When you create an estate plan, you probably assume all your assets will be handled according to your will or trust. But here’s the surprise: some accounts have their own rules that can override your plan entirely. If you haven’t reviewed the beneficiaries named for your retirement plan (e.g. IRA, 401(k), etc.) or life insurance policy lately, there is no time like the present.
What Are Beneficiary-Designated Assets?
Assets held inside your revocable trust are distributed according to the terms of that trust after you pass away. But assets that ask you to name a beneficiary don’t follow your trust or will. Instead, they pass directly to the beneficiary or beneficiaries listed on the account. Common examples include:
- Retirement accounts: 401(k), 403(b), traditional IRA, or Roth IRA
- Life insurance policies
- Annuities
If you don’t name a beneficiary, or if your beneficiary dies before you, the company’s default rules take over. Those rules might send the funds to your estate, your beneficiary’s estate, or even to your beneficiary’s children. Unfortunately, that may not be what you want.
A Common Example
Let’s say you buy a life insurance policy and list your daughter as the only beneficiary. Years later, she passes away, but you never update the form. When you die, the insurance company won’t follow your trust or will, but will only look to the life insurance policy. Depending on the fine print, the proceeds might go to your estate, your daughter’s estate, or her children. The result? Your carefully planned estate might not be followed at all.
When the Beneficiary Is a Minor
If the named beneficiary is a minor child, things get even trickier. Life insurance companies can’t pay the funds directly to a minor. The money will be held until the child turns 18 and a court will likely need to appoint a conservator to manage it. That process can be expensive and slow. The conservator must be bonded, file yearly reports with the court, and often get approval for every withdrawal. A better approach is to:
- Name an adult custodian under the Uniform Transfers to Minors Act (UTMA), or the trustee of a trust created in your will; or
- Consult with your estate planning attorney regarding how to direct the beneficiary-designated assets to an irrevocable children’s trust
These options allow someone you trust to manage the funds responsibly and avoid court involvement.
Special Rules for Retirement Accounts
Retirement accounts, such as 401(k)s and IRAs, add another layer of complexity. These accounts are usually funded with pre-tax dollars, which means you don’t pay income tax until the money is withdrawn. Once you reach age 73 (those of you turning 73 in 2025), you must withdraw a yearly Required Minimum Distribution (RMD) based on your life expectancy. When you name a beneficiary for these accounts, your goal is to preserve tax-deferred growth for as long as possible. The wrong designation could cause your heirs to pay taxes sooner than necessary.
Don’t Forget About Debts and Taxes
Here’s another hidden issue: debts, estate expenses, and taxes are typically paid from assets that pass under your will. If most of your property passes directly to beneficiaries or co-owners, your estate might not have enough cash to pay those bills, which leaves your executor with a problem and your intended heirs with less than expected.
Review and Coordinate
Beneficiary designations are easy to set and easy to forget. But they play a major role in how your estate is actually distributed. Take time to:
- Review all your accounts
- Confirm both primary and secondary beneficiaries
- Make sure they align with your overall estate plan
At Catalyst Law, we help clients review, update, and coordinate their beneficiary designations so that your wishes, not a company’s default rules, guide the outcome.
Ready to Review Your Beneficiary Designations?
If it’s been more than a few years since you last reviewed your accounts—or if you’ve had a major life change such as marriage, divorce, or the birth of a child—it’s time to make sure everything still fits your goals. Schedule a consultation with our estate planning team to review your beneficiary designations and ensure your plan works exactly as intended.
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