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When people think about estate planning, wills and trusts often come to mind first. But there is a simple tool that can make a big difference in ensuring your assets pass smoothly to your loved ones: beneficiary designations.
A beneficiary designation is a simple way to name who will receive a particular asset when you pass away. Many types of accounts and financial products allow you to assign beneficiaries, such as:
Retirement accounts (IRAs, 401(k)s, etc.)
Life insurance policies
Bank accounts and certificates of deposit (often through a “payable on death” or “transfer on death” designation)
Investment or brokerage accounts (through a “transfer on death” designation)
When you pass, these assets typically transfer directly to the named beneficiary, avoiding the delays and expenses of probate and ensures the asset will be immediately available to your beneficiaries.
When Is It Appropriate to Name a Transfer on Death Beneficiary?
Naming a transfer on death beneficiary is often appropriate if you want assets to pass quickly and efficiently to a loved one without going through probate. For example, a bank account with a transfer-on-death designation will transfer directly to your chosen individual, even if your will says something different.
That said, beneficiary designations are not always the best choice in more complex family or tax situations.
For instance, if you have minor children, loved ones with special needs, or blended family dynamics, direct transfer to the beneficiary may create unintended consequences. In those situations, it may be more effective to use a trust. 💡 (contact an expert estate planning attorney for your individual situation)
How Beneficiary Designations Work With Other Estate Planning Tools ⚒️
It is important to understand that beneficiary designations override what is written in your will or trust. If your will leaves your life insurance policy to your spouse but your policy lists your sibling as the beneficiary, the insurance company will pay your sibling. This is why aligning your beneficiary designations with your overall estate plan is critical.
Trusts and wills are powerful tools, but they need to be coordinated with your beneficiary designations to ensure everything works together.
Why Keeping Beneficiary Designations Up to Date Matters… 3 Real Examples From My Experience As A Rhode Island Estate Planning Attorney
Life changes such as marriage, divorce, births, deaths, or simply a change of heart can make your old beneficiary designations outdated. Unfortunately, financial institutions will follow whatever is on file, even if it no longer reflects your wishes.
Outdated designations are one of the most common and preventable estate planning mistakes, such as:
(these are actual clients of mine with their names changed to protect their identities)
No Contingency Plan
Bill and Mary were happily married for 50 years with no children. Each had a life insurance policy naming the other as beneficiary. Bill passed away in December 2024, and Mary received the proceeds. Sadly, she passed shortly after. Because there was no backup beneficiary, everything Mary inherited from Bill, plus her own estate, went through probate. The moral? Updating your beneficiaries takes a few minutes. Probate takes months—or years.
Divorce
Most people know they should update their will, trust, and powers of attorney after a divorce. But that is only half the job. You also need to update your beneficiary designations. George divorced Fran 25 years ago and scrubbed her from his will and house deed. Smart. What he forgot? Stock certificates and bonds that still named Fran. The result: Fran got a payout George never intended, and his family got an unpleasant surprise.
Old Relationships
When Tony signed up for his first 401(k), he was dating Angela. He dutifully named her as his beneficiary and then forgot all about it…
Fast forward 20 years, two IRAs, and a family later, that designation was still in place. When Tony passed, his kids discovered dad’s ex-girlfriend Angela was still on the receiving end. You can imagine how that went over.
Regularly reviewing and updating your designations ensures your assets pass the way you intend. A good rule of thumb is to review them at least every few years or after any major life event.
The Bottom Line: Update Your Beneficiary Designations To Align With Your Living Trust and Overall Goals
Beneficiary designations may seem simple, but they play a critical role in your estate plan. They can help your loved ones avoid probate and access important resources quickly, but if not handled carefully, they can create confusion or conflict.
