Updated from the original, published in November 2005
William Jamison left his life insurance benefit to his former domestic partner.
Of course, he never intended to bequeath a considerable part of his estate to a woman who had exited his life years ago. It just never occurred to him to change the beneficiary on his insurance policy after they separated.
When his current wife discovered the oversight after his death — and in spite of the fact that his will called for his wife to inherit the entire estate — it was too late to correct the error.
Do you know who your beneficiaries are?
By naming beneficiaries, you help to ensure that your assets are distributed as you intend them to be upon your death. If you own a financial account individually and name a beneficiary for it, the asset is passed directly to your beneficiary upon your death.
Reduced time and cost
Beneficiary designations allow you to avoid probate with respect to specific assets. If you fail to name a beneficiary, the asset becomes part of your estate and is therefore subject to probate — a potentially complicated and time-consuming legal process.
Unlike probate, there are no public records disclosing the beneficiaries on your accounts.
Naming Your Beneficiaries
You can name beneficiaries for life insurance policies, retirement accounts, payable-on-death bank accounts, brokerage accounts, securities and various other types of investments.
To take advantage of beneficiary designations, first make sure that you have actually named a beneficiary for all assets and accounts that provide for them.
Then, because your beneficiary may predecease you, consider naming a secondary beneficiary.
Because circumstances change, make sure you review all of your beneficiary designations on a regular basis. Marriage, divorce, remarriage, or a death in the family should trigger a review of your beneficiaries.
Estate Planning Implications
Be sure to coordinate your beneficiary designations with your overall estate plan. If you have a beneficiary designation that contradicts the instructions in your will, the beneficiary designations generally prevail.
And while beneficiary designations avoid probate, they generally do not avoid estate taxes — so planning and coordination are required to ensure that your after-tax estate accrues to all beneficiaries in the proportions you intended. The funding of trusts under your will could be significantly affected by your beneficiary designations.
Finally, it is important to consult with your estate planning professional when setting up beneficiary designations, as the general rules above can be impacted by state law.
For example, if the William Jamison in our example had lived in Washington State, and his former partner was actually a former wife, the beneficiary designation on his life insurance policy would have been automatically revoked by his divorce.
Don’t let your financial assets go to the wrong person.