Estate Planning Basics: Coordinating Beneficiary Designations

Here is a fairly typical scenario that I see all too frequently. A happily married couple, Fred and Susan, have put together a basic estate plan for themselves but have failed to coordinate their beneficiary designations.

They have what are commonly referred to as “sweetheart wills”. Fred has a will that leaves all of his assets to Susan, and Susan has left all of her assets to Fred.

Here is a list of the assets that they each have:

Fred’s Assets

• $200,000 of equity in the marital home (½ of a Tenancy by the Entirety with Susan)
• $25,000 in a checking account at Suntrust Bank
• $150,000 in a CD at Suntrust Bank
• $300,000 in a 401(k) through his employer
• $500,000 face value life insurance through NY Life
• $200,000 in a brokerage account at Fidelity

Susan’s Assets

• $200,000 of equity in the marital home (½ of a Tenancy by the Entirety with Fred)
• $50,000 in a checking account at Suntrust Bank
• $200,000 in an IRA at Fidelity
• $100,000 in a brokerage account at Fidelity

What happens when Fred or Susan die?

You are probably assuming that Susan will get all of Fred’s assets, or Fred would get all of Susan’s assets, right?

Wrong.

I’ll start by saying that the marital home, which is held in joint name, would pass to the surviving spouse outside of probate. No issues there.

But the remainder of Fred or Susan’s assets could go to anyone else in the world, no matter what their wills say.

How is this possible?

Here’s the thing about wills – they only divide up assets that are titled in your individual name and do NOT have a beneficiary designation attached to them. These assets are frequently referred to as “probate assets“. Common probate assets include real property listed in one person’s name only (or as tenants in common), bank or investment accounts in one person’s name with no beneficiary designation, personal property (clothing, furniture, artwork, etc.), and vehicles listed in one person’s name only.

Assets that are titled in joint name or in a trust, or assets titled in an individual’s name with a beneficiary designation will not be subject to probate, so whatever you put in your Will doesn’t mean a darn thing.

Back to Fred and Susan’s accounts. Why won’t Fred and Susan have a probate estate?

It’s simple – every single account listed above, (and this is not an uncommon list), has the ability to attach a beneficiary designation to it. That means that when the account holder dies, the money would immediately transfer to whomever the account holder listed on their designation form.

So the SunTrust CD and checking accounts could each have a payable on death (POD) designation on them. That means that whoever is listed on that designation would receive those funds almost immediately after the account holder dies.

The same is true for the 401(k), the life insurance policy and the IRA/Brokerage Accounts at Fidelity.

Why Coordinating Beneficiary Designations is Important

So in estate planning, not everything is always as it seems. Just because you have a will that leaves things as you want, does not always mean that the person named in your will would get the assets that you intended them to.

And this is not necessarily a malicious thing. Over time, people fail to review their will and open new financial accounts. Adding a beneficiary designation is one of the first things that many people are asked to do when they open a new bank or investment account somewhere. It’s almost automatic if someone opens up a new account online. And if they don’t have their estate plan handy, they may forget who the proper beneficiary should be.

And there are other problems that can occur by failing to coordinate beneficiary designations with your estate plan. For instance, leaving accounts to a minor child, a former spouse (in the case of divorce) or to someone who is deceased.

In any of those situations, your estate plan may be updated, but your account designations may not be.

The Easiest Path…

The easiest way to coordinate your beneficiary designations with your estate plan is to name the same vehicle for all of your accounts – such as a revocable living trust. If you choose to change your estate plan later, you would only change the trust and all of your accounts would automatically go to whom you want them to go to when your time is up.

At The Hart Law Firm, we are happy to do a no-cost review of your current estate plan to make sure that your beneficiaries are set up just the way you want them to be. Simply fill out our online form or call our office at (919) 460-5422 to set up a time to meet with estate planning attorney James Hart.