Estate Plan vs. Beneficiary Statement

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Misconception: “My designated beneficiaries on my IRAs and 401(k) are no longer relevant because I have had my estate planning done and I have a living trust.”

Not so – don’t make this mistake.

Bottom Line

The beneficiary statement, whether it is for your 401(k), IRA, life insurance and so on is a will substitute. It matters not how your wills or trusts are written; the beneficiary statements dictate where those monies go. We recommend that you have your estate planning attorney periodically review these to make sure they are properly coordinated with your overall estate plan.

Tell Me More

This item deals with the transfer of asset at death. When a person passes away, each financial institution will look for an instruction about who should inherit the money. In many cases, a beneficiary is designated upon account establishment, such as in the case of a 401(k), IRAs, life insurance policies and so on. A beneficiary designation provides the necessary instruction to the institution for the distribution of the asset. But in cases where there is no beneficiary designation, such as an individual account or real estate, there is no instruction about to whom this money should go. As such, the asset has to pass through probate, which is often slow, expensive and very time-consuming.

A living trust is used to prevent those assets that do not have a beneficiary designation from going through the probate process. One typically hires an estate planning attorney to write a legal document called a living trust which outlines to whom you would like your asset to pass upon your death. This document is then used by the financial institutions to change registrations on accounts where there is no beneficiary designation. So, your account would become the John and Jane Doe Living Trust, instead of just John and Jane Doe. This document tells the financial institution to whom the authority of directing the money goes.

However, people often confuse a living trust document with their beneficiary designations and assume that it supersedes that of their beneficiary designations. This is not the case; in fact, the opposite is true… all beneficiary designations trump whatever is written in the trust. In other words, if you named your last girlfriend as a beneficiary on your 401(k) and forgot to update it, she will get the asset even if you have a living trust with your wife!

Authored by Vincent J. Whelan, CFP® & Portia L. White, CFP®

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