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Planning Beneficiary Designations for Life Insurance

March 26, 2024

Assets such as life insurance and retirement accounts typically pass by beneficiary designation upon your death. Similarly, some non-retirement accounts may allow you to name beneficiaries. Such accounts are commonly referred to as payable on death (POD) or transfer on death (TOD) accounts.

Assets with a beneficiary designation will pass directly to the named beneficiary or beneficiaries upon your death (assuming, of course, that one or more beneficiaries have been named and such beneficiaries survive you). This means that the provisions in your will or trust will not necessarily control who receives these assets; rather, the beneficiary designation will dictate who will receive these assets upon your death.

It’s important to fill out and submit beneficiary designation forms properly – mistakes can cause problems and have unintended consequences. Below are some of the most commonly made mistakes that you should try to avoid when designating beneficiaries.

Naming a Minor Child

A minor child is not able to receive a distribution of assets, so a court will appoint a guardian or conservator to manage the assets until the child is an adult (usually age 18 or 21, depending on the state of residency). This type of court proceeding can be costly and cumbersome, and the assets would be distributed outright to the child upon reaching the age of majority. Depending on your specific situation, you may not want your child to receive the assets outright at such a young age. Instead, it’s advisable to create a trust for the benefit of the minor child that’s named as the beneficiary. The trustee of the trust can hold and manage the asset for the minor child in accordance with your specific wishes as outlined in the trust agreement.

Naming an Individual with Special Needs or Financial Problems

Similarly, an adult child (or other individual) with special needs could lose government benefits if they directly receive assets because it may cause them to own too many assets to continue to qualify. In addition, an adult with financial problems may be at risk of losing assets as a result of bankruptcy, divorce, or if a creditor obtains a judgment against them. In these situations, it’s preferable to create a trust for the benefit of the individual that’s named as the beneficiary in order to protect the assets.

Failing to Periodically Review and Update Beneficiaries

You should review and update your designated beneficiaries on a regular basis. As your circumstances change, your beneficiaries are likely to change too. For example, if you recently got married, you’ll probably want to update your beneficiary designation to reflect your new spouse. And, if you’re divorced, you’ll also want to update your beneficiary designations so that your former spouse is no longer named as a beneficiary (unless it’s otherwise required by a court order or agreement). Or, if a beneficiary has predeceased you, it’s a good idea to update as appropriate for your specific situation. If there is no one named as a beneficiary (or no named beneficiary survives you), your estate is usually the default beneficiary, depending on your financial institution’s policies.

Failing to Coordinate with Your Overall Plan

It’s critical to align your beneficiary designations with your overall plan so that everything is consistent and is distributed in accordance with your wishes. When you die with assets that have beneficiary designations, the assets go directly to the beneficiaries named on the accounts, bypassing the probate process, which can sometimes be lengthy and expensive. However, because these beneficiary designations override your will, they need to be carefully coordinated to ensure they work as anticipated.

Have You Updated Your Beneficiary Designations?

If it’s been awhile since you’ve reviewed your beneficiary designations, your situation may have changed and they may need to be updated. Otherwise, your plan may not work as intended. Now more than ever, it’s important to have experienced advisors assist you. First Western Trust can work with your attorney and other advisors to help implement your plan.

About First Western

In 2002, Scott Wylie, an entrepreneur and banker, led a group of Western business leaders to create an organization that provides individuals with high levels of sophistication and personalized boutique service. The result of this effort is the first Western-based private bank – First Western Trust.

We believe that each of our clients shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services. We offer a trusted advisor platform with an established approach to investment management through a branded network of private boutique offices.

To learn more, visit us online at www.myfw.com.


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