If you have an IRA or 401(k) plan, you have most likely completed paperwork for the issuing financial institution that designates account beneficiaries for the accounts’ assets after you pass. These types of account beneficiaries are common for accounts or products issued by financial institutions such as retirement accounts, life insurance policies, annuities and more. Are these assets included in your last will and testament? If so, are there any discrepancies with the beneficiaries you have indicated for each financial product? If not, and even if your financial product assets are not specifically listed, have you assumed they will be generally distributed according to your wishes stated in your last will and testament?
The Roadmap: A Will
A last will and testament is a legal estate planning document designed to eliminate ambiguity and express your intentions for distributing your possessions upon your death. It lists its own beneficiaries for various assets detailed in the will, and, if applicable, names guardians for any minor children. Additionally, a will appoints an executor for your estate who is charged with fulfilling your will’s conditions, even if your named beneficiaries disagree.
A will serves as a roadmap, guiding the executor and the probate court, where a judge must review and interpret the will and officially distribute the possessions–and there may be multiple potential routes to the destination.
The Direct Route: An Account Beneficiary
One of the biggest benefits of retirement accounts is the quick timeline for receiving the asset. When an individual sets up a financial product – such as a retirement account, life insurance policy, or annuity – the issuing company typically requires that individual designate one or more beneficiaries, which are people or an organization who will receive that account’s benefits when you pass away. The beneficiary designations are separate for each asset and considered a contract between the account holder and the issuing company, which protects the asset from claims by other parties. Since distributions are paid directly by the financial institution who issued the product, these assets do not go through probate.
The Intersection: Account Beneficiaries and Last Will and Testaments
Financial account beneficiaries and last wills and testaments both help determine who will receive an estate’s assets. Understanding their key differences can help you create a comprehensive estate plan.
Here are some key differences between financial account beneficiaries and last wills and testaments:
– Financial account beneficiaries are named directly on the account, while last wills and testaments name beneficiaries through a legal document.
– Financial account beneficiaries typically take effect within a few weeks, while last wills and testaments take several months or more to be processed.
– Financial account beneficiaries typically access funds without probate, while last wills and testaments require probate before funds can be distributed.
Competing Directions: Account Beneficiaries and Last Will and Testaments
Since last will and testaments are typically viewed as generally comprehensive of an individual’s assets, they sometimes also include specific directions for their financial assets with named account beneficiaries. If any listed beneficiaries do not align with an account’s designated beneficiary, the account beneficiary supersedes the will, meaning the designated account beneficiary, as listed with that account’s issuing company, will receive those assets.
Example 1: Let’s say a husband’s recently updated last will and testament names his current wife as the recipient of all of his assets, or even specifically states she should receive the assets from a life insurance policy written by John Hancock. However, this life insurance policy was set-up almost thirty years prior and the initial account paperwork completed for John Hancock designates his first wife as the primary beneficiary. The life insurance policy’s beneficiary has not been updated since the initial setup. However, since an account’s specific beneficiary – in this case, the designee indicated in the John Hancock paperwork for the life insurance policy – supersedes the more recent last will and testament, the first wife will receive the distribution of the policy’s funds from John Hancock fairly immediately after the death. Meanwhile, the estate continues through the lengthier probate court process and, guided by the last will and testament, distributes the husband’s possessions and assets not designated by a specific account beneficiary to his second, current wife.
Example 2: A mother’s last will and testament states she would like for her three sons to equally share all of her assets and generally does not list specific assets. The mother has a $500,000 life insurance policy with State Farm that names her youngest son as the beneficiary. She has an additional $1.5 million in assets that will pass through probate and go according to her will. The youngest son will receive the $500,000 life insurance payout from State Farm, and all three sons will evenly split the $1.5 million in assets that pass through probate. Therefore, the youngest son will inherit $1 million while the other two sons inherit $500,000 each.
Given these nuances of the estate planning process, it is essential to disclose to your estate planning attorney a full picture of all your assets and their respective beneficiaries, including any changes as they occur.
Be Sure Your Estate Plan Follows a Safe Route
Proper estate plans typically feature estate planning documents combined with account beneficiaries and asset titling. With time, estate planning needs often evolve, and your estate planning documents should evolve with them to ensure they accurately represent your wishes. We recommend periodically reviewing your estate planning documents – including all account beneficiaries and your last will and testament – generally at least every 3–5 years and specifically after any major life changing events (e.g., marrying, divorcing, having children, receiving an inheritance, selling a business, etc.). If it’s time for a review of your estate planning documents, let’s take a look together.