Beneficiary Designations

Clients spend lots of time, money, and energy planning their estates. Estate Planning attorneys help them by counseling these clients and preparing various documents to meet the goals of the client, such as a Will or Trust.

All too often a client forgets to mention and the attorney forgets to ask about assets that pass via beneficiary designations. This could be disastrous for all concerned.

An increasing part of American wealth is governed by beneficiary designations. According to Statista, Americans had over $32 trillion in retirement assets alone. That’s trillion with a “t.”

This blog series will focus on beneficiary designations. This first blog in the series focuses on one of the pitfalls of missing a beneficiary designation. Experienced Estate Planning attorneys know there can be a great deal involved in deciding to whom the retirement assets should go and how. But let’s look at a simple example of a retirement plan designation screw up.

John was married to Betty. John had a small IRA on which John had named his mother as the beneficiary many, many years ago. John didn’t think much about the IRA. It only had $30,000 and he hadn’t touched it in many years. He also had a retirement plan at work which had several hundred thousand dollars. The retirement plan at work named Betty as the beneficiary.

John and Betty consulted an Estate Planning attorney who helped them with a plan leaving everything to the survivor of them with appropriate distributions to their children after the death of the survivor of them. The small IRA would still go to John’s mother.

When John retired, he was considering what to do with his retirement plan. He was frustrated by the investment options available under his work retirement plan. He knew an IRA had much more flexible investment options. So, John did a rollover of the retirement plan into his IRA.

John had forgotten that he had named his mother as the beneficiary of his IRA. The assets which had been in his retirement plan, which comprised the bulk of his assets, now would go to his mother instead of his wife at his death. Worse yet, while Betty had assets of her own from her employment, John’s children likely would lose out on the bulk of the assets going to his mother. His mother had 35 grandchildren and her estate plan left assets to them equally.

This beneficiary designation snafu thwarted the planning which had been done for John’s assets. Maybe John’s mother would agree to give the assets to John’s widow and children. But maybe she would not or could not due to incapacity. This highlights the need to examine beneficiary designations each time there’s any change. It also highlights the need to examine beneficiary designations periodically, when the plan is reviewed.

The Estate Planning attorney in this situation might get dragged in through no fault of their own. However, if they miss this designation snafu upon a review, they could have increased liability. It’s a best practice to get a copy of the beneficiary designation on each such asset. Client’s often forget the designation they made because it could have been years earlier. So, be a hero to your clients and save yourself a potential problem by getting a copy of the beneficiary designation.

Beneficiary designations can be deceptively simple. Just beware of the rest of the iceberg. The next blog in this series on beneficiary designations will examine how beneficiary designations which might have been ideal before the SECURE Act might now have unintended consequences.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com