You signed your will. You carefully decided who should inherit your property. You tucked the document safely away and assumed the job was done.
But here’s a question many people don’t think to ask:
What if the beneficiary listed on one of your financial accounts is different from the person named in your will?
Which one wins?
In most situations, the beneficiary designation does.
That’s an important distinction because your will does not necessarily control everything you own when you die.
Your Will Doesn’t Control Every Asset You Own
One of the biggest estate planning misconceptions I encounter is the belief that a will is the final instruction sheet for everything someone owns.
It isn’t.
A will generally directs the distribution of your probate assets. But many commonly owned assets can transfer outside of probate altogether.
That’s where beneficiary designations become so important.
Consider this example:
You update your will and state that everything should go equally to your two children.
But an IRA you opened 20 years ago still lists your sister as the beneficiary.
You may assume the new will changed everything.
It probably didn’t.
An IRA is generally governed by its beneficiary designation rather than by the instructions in your will.
That beneficiary form you filled out years ago can therefore have an enormous impact on your estate plan.
What Assets Commonly Have Beneficiary Designations?
Several types of assets can pass according to beneficiary designations or contractual transfer instructions rather than through your will.
These may include:
- Life insurance policies
- Individual retirement accounts, or IRAs
- 401(k)s and other employer-sponsored retirement accounts
- Annuities
- Payable-on-death, or POD, bank accounts
- Transfer-on-death, or TOD, investment and securities accounts
When the owner dies, these assets will generally pass according to the beneficiary designation or contractual terms of the account rather than according to the will.
That’s why estate planning has to involve more than drafting documents.
Your will, trust, account ownership and beneficiary designations all need to work together.
So Can a Beneficiary Designation Really Override My Will?
Often, yes.
Suppose your will says:
“I leave my estate equally to my three children.”
But your $300,000 life insurance policy names one child as its sole beneficiary.
Assuming that beneficiary designation is valid and no other legal issue changes the result, the insurance company will pay the $300,000 to the child named as beneficiary. The provision in your will dividing your estate among all three children generally does not change that result.
The same basic issue can arise with retirement accounts and POD or TOD accounts.
That doesn’t necessarily mean something went wrong.
Sometimes people intentionally structure their assets this way.
The problem arises when the beneficiary designation reflects an old decision rather than the person’s current wishes.
The Beneficiary You Forgot About
Think about how many things can change over 10, 20 or 30 years.
- You get married.
- You get divorced.
- You remarry.
- Children are born.
- Children become adults.
- Relationships change.
- A beneficiary dies.
- You open new accounts.
- You roll an old retirement account into another account.
- You change financial institutions.
Your estate plan changes, but the beneficiary designation on an old account doesn’t. I see this more often than you might think.
That’s how unintended inheritances can happen.
A beautifully drafted will cannot necessarily fix an outdated beneficiary designation on an asset that passes outside of the will.
This is why reviewing beneficiary designations should be part of an estate planning review, not something handled separately and then forgotten.
What Happens to Beneficiary Designations After a Florida Divorce?
Divorce is one area where Florida law adds another layer.
Florida law generally provides that certain beneficiary designations made in favor of a former spouse before a divorce are treated as void after the marriage is dissolved. That rule can apply to certain retirement accounts, POD and TOD accounts, life insurance policies and annuities.
But there are important exceptions, including situations in which federal law or the terms of a particular agreement or court order may control.
That’s why I don’t recommend relying on the assumption that “Florida law will automatically take care of it.”
If you get divorced, review your estate planning documents and your beneficiary designations.
Better yet, actually update them.
Make your intentions clear rather than leaving your family to determine later which law, contract or exception controls.
What If My Beneficiary Dies Before I Do?
This is where the contingent beneficiary becomes important.
A primary beneficiary is the first person or entity designated to receive an asset. A contingent, or secondary, beneficiary is generally the person designated to receive it if the primary beneficiary cannot.
What happens when no designated beneficiary survives can depend upon the account and its governing documents.
In some situations, an asset without a surviving beneficiary may ultimately become payable to your estate.
And once an asset becomes part of your estate, probate may enter the picture.
One small blank space on a beneficiary form can therefore make a meaningful difference.
Should I Just Name My Estate as the Beneficiary?
Not automatically.
Remember, one of the reasons beneficiary-designated assets can be useful is that they may transfer outside probate. Naming your estate can bring an asset back into the probate process.
There may certainly be circumstances in which naming an estate or trust is appropriate, but that should be an intentional planning decision, not a default choice.
Retirement accounts in particular can involve additional tax and distribution considerations depending upon who—or what—is named as beneficiary.
This is one area where I would not recommend changing a beneficiary simply because you read that one choice is “better” than another.
The beneficiary decision needs to be coordinated with the rest of your estate plan.
Before You Start Changing Beneficiaries
Reviewing your beneficiary designations does not necessarily mean you should start changing all of them to individual beneficiaries.
If you have a trust, there may be very good reasons the trust—or a particular individual—is named as beneficiary of a particular account.
For example, perhaps your trust provides protections for a beneficiary’s inheritance. Perhaps you have minor beneficiaries. Perhaps you intentionally created different provisions for different family members. Retirement accounts can also present additional tax considerations.
Changing a beneficiary designation without considering the rest of the plan can solve one problem while creating another.
The goal isn’t simply to have a beneficiary listed.
The goal is to make sure the beneficiary designation works with the estate plan you intentionally created.
Isn’t Having a Beneficiary Enough to Avoid Probate?
For that particular asset, a valid beneficiary designation may allow it to transfer outside probate.
But that doesn’t mean you don’t need an estate plan.
You may still own:
- A home or other real estate
- Vehicles
- Personal property
- Business interests
- Accounts without beneficiary designations
- Assets acquired later in life
- Property for which a beneficiary has already died
And your estate plan addresses much more than simply who receives an account.
A will can nominate a personal representative and establish your wishes for probate assets. Trusts, powers of attorney, health care documents and Florida homestead considerations can also play important roles depending upon your circumstances.
Estate planning is about making sure all of those pieces fit together.
The Estate Planning Checklist Most People Miss
When reviewing your estate plan, don’t stop after looking at the date on your will or trust.
Pull the actual beneficiary information for your:
- Life insurance
- IRAs
- 401(k)s and other retirement plans
- Annuities
- Bank accounts with POD designations
- Brokerage accounts with TOD designations
Then ask yourself:
Is this still the person I want receiving this asset?
Also check whether you’ve named a backup beneficiary and whether the designation works with the rest of your estate plan.
Don’t assume you remember what you selected years ago.
Actually look.
Ask Heidi: Which Is More Important—My Will or My Beneficiary Designations?
That’s a little like asking which wheel on the car is more important.
They need to work together.
Your will may say exactly what you want. Your trust may be thoughtfully drafted. But if your largest assets have beneficiary designations that point in a completely different direction, your overall estate plan may not accomplish what you intended.
That’s why an estate planning review shouldn’t begin and end with:
“Do you have a will?”
It should also include questions such as:
- How are your assets titled?
- Which assets have beneficiaries?
- Who are those beneficiaries today?
- Do you have contingent beneficiaries?
Have there been marriages, divorces, deaths or other major changes since you made those selections?
And most importantly, do all of those decisions tell the same story?
Because when your family eventually needs your estate plan, they shouldn’t have to guess which version of your wishes was the right one.
If it has been a while since you reviewed your beneficiary designations, or you’re not sure how they coordinate with your will or trust, contact my office to schedule an estate planning review.
Sometimes one of the most important parts of an estate plan isn’t a new document.
It’s making sure the documents and decisions you already have still work together.
Heidi S. Webb, Attorney at Law, proudly serves clients in Daytona Beach, Ormond Beach, Port Orange, and beyond with compassionate and comprehensive estate planning services. Let’s work together to protect what matters most to you. Visit her page on Facebook, or see what her clients are saying to learn more about Heidi.
