Baldwin County Estate Planning Attorney – Beneficiary Designations

Reviewing and possibly changing your beneficiary designations is an important part of comprehensive estate planning.

What is Meant by Beneficiary Designation?

Most accounts, life insurance and other financial products allow the owner to designate one or more beneficiaries who will receive the death benefit or the assets within the account on the death of the account owner.  The beneficiary designation function is usually built into the account agreement with the financial institutions.  If everything is set up correctly, the account or insurance policy benefit will transfer directly to the beneficiary without the need for probate. Depending on the account, the beneficiaries may be referred to as death beneficiaries, pay on death beneficiaries (POD), transfer on death beneficiaries (TOD), or other similar terms.

Why Is It Important to Review Beneficiary Designations as Part of Estate Planning?

Since ownership of the death benefit may move to the beneficiaries without the need for probate, the beneficiary designation may effectively override plans for a distribution through a Last Will and Testament or other estate planning. The beneficiary designations need to match up with the entire plan of distribution.

Beneficiary designations are sometimes overlooked in general and even sometimes as a necessary part of the estate planning process. Beneficiary designations are usually set up when the account is opened. For a longstanding account, there may be a lot of changes over time that would call for a change in the death beneficiaries. For example, in their 20s an employee may start a job featuring an employer sponsored 401(k). As a single person, having no one else at the time, the employee may designate a parent or a sibling as the beneficiary. Later, the employee gets married and has children. Unless the employee reviews that beneficiary designation and changes it to the employee’s spouse, the parent or sibling originally assigned as the death beneficiary will remain as the death beneficiary. At the death of the employee, ownership of the assets in that 401(k), which could be substantial, would most likely automatically pass to the parent or sibling even if the employee’s will left the employee’s entire estate to the employee’s spouse.

Outside factors such as death or divorce may affect beneficiary designations. For example, on most accounts, the beneficiary must be living to receive ownership of the account. If a beneficiary dies, the beneficiary designation effectively changes to the successor beneficiary. By Alabama law, for many types of accounts, an ex-spouse is automatically disqualified as a beneficiary following divorce.  On death, if there are no living beneficiaries, the account will likely pass to the estate.

The Law Office of Brenton C. McWilliams is an Estate Planning, Elder Law and Probate Law Firm serving clients in Baldwin County including our local cities of Orange Beach, Gulf Shores, Foley, Elberta, Summerdale and Robertsdale. For a consultation please call (251) 215-9275 or request a consultation on the consult request page.