Estate Planning – What is a Beneficiary Designation?
By Attorney Jennifer Kahl, February 25, 2019
To put it succinctly, a beneficiary designation is a contractual agreement between you and the custodian of your asset that dictates where your asset will go when you die. Now, let’s take that statement apart piece by piece.
The term “beneficiary designation.” Most insurance policies and retirement plans use the term “beneficiary designation.” Banks and financial institutions usually use the terms “pay on death” or “transfer on death.” These phrases are usually abbreviated to POD or TOD, respectively. However, all of these terms mean the same thing.
The “custodian.” In this context, a custodian is the entity that holds an asset on your behalf. It may be your bank, your brokerage firm, or your insurance company. Simply, these companies hold something that you own.
The contract: When you transferred your asset to the custodian, you entered into a contract with it. The custodian agreed to hold your money (or policy, or stocks, etc.) and the contract stipulated the terms of that agreement. Part of that contract addresses what will happen to your asset when you die. The beneficiary designation is where you can change that part of the contract by listing the individual(s)/entity(ies) who will get your asset when you die.
Who or What can I name as my beneficiary? When selecting beneficiaries, you can get as creative as your custodian allows. Remember, a beneficiary designation is just a contract between you and the custodian, so as long as the two of you come to an agreement, just about anything can work. This means you could name any number of individuals, trusts, charities, or for-profit organizations and designate what percentage, fraction, or sum amount that each beneficiary would get. Do not feel limited by the spaces provided on your custodian’s “change of beneficiary” form. Just because the form gives you four spaces with percentage values doesn’t necessarily mean they won’t accept a fractional division among five beneficiaries. If the “change of beneficiary” form isn’t sufficient for your plans, include an attachment with your instructions and see if the custodian will accept it.
Most custodians will allow you to name contingent beneficiaries. This means you can direct what will happen to your asset if one of your primary beneficiaries dies before you do.
What happens to my asset when I die? When you die, the beneficiary designation will control where the asset goes. Your beneficiary should contact your custodian and provide whatever documentation is necessary to take control of the asset. Unless your asset becomes part of your estate (see the paragraph below), your Will is irrelevant to this asset and your personal representative won’t have any control over it.
What happens if I don’t name a beneficiary? If you didn’t select a beneficiary, or if all the beneficiaries you selected are dead, the terms of the contract will decide what happens. Sometimes, the contract may say that the asset passes to your next-of-kin. More commonly, the asset passes to your estate and its disposition is controlled by your Will. This often creates a situation where you are forced into formal probate proceedings, so you should make sure that your beneficiary designations are up-to-date!
What about my will? Because your beneficiary designation is a contract with your custodian, it takes precedence over you will. Your will only “scoops up” what is left after your contracts have been satisfied. Therefore, it is vitally important to review your beneficiary designations regularly!
Conclusion Your beneficiary designations are a critical component of your estate plan. A good estate planning attorney will review these with you and make sure that they are working in harmony with your overall plan. The attorneys at The Heritage Law Group can help you do this.