Beneficiary Designations: The Estate Planning Step Most People Forget

Beneficiary Designations: The Estate Planning Step Most People Forget

You've got a will. Maybe you've even set up a trust. But if you haven't reviewed your beneficiary designations recently, there's a good chance your estate plan has a gap big enough to drive a truck through.

Beneficiary designations are the instructions attached to specific financial accounts—telling the institution who should receive the money when you die. They're simple to set up, easy to forget, and powerful enough to override everything else in your estate plan.

What Accounts Have Beneficiary Designations?

More than you might think. The following accounts typically include a beneficiary designation form:

• Life insurance policies — term, whole life, universal life
• Retirement accounts — 401(k)s, IRAs, Roth IRAs, 403(b)s, pensions
• Bank accounts — payable-on-death (POD) designations
• Brokerage accounts — transfer-on-death (TOD) designations
• Annuities
• Health savings accounts (HSAs)

Each of these accounts passes directly to the named beneficiary at death. They don't go through probate. They don't follow the instructions in your will or trust—unless the beneficiary and the will happen to say the same thing.

Why Beneficiary Designations Override Your Will

This is the part that surprises most people. Under Texas law and federal regulations governing retirement accounts, a beneficiary designation on a financial account takes priority over any conflicting instruction in your will.

Here's an example: You divorce your first spouse and remarry. You update your will to leave everything to your new spouse. But you never changed the beneficiary on your 401(k)—which still names your ex. When you pass away, your ex gets the 401(k). Your current spouse gets nothing from that account, regardless of what the will says.

This isn't a hypothetical. We've seen it happen, and it creates exactly the kind of family conflict and legal expense that estate planning is supposed to prevent.

Common Beneficiary Designation Mistakes

Here are the errors we see most often:

• Naming a minor child as a direct beneficiary. Minors can't legally receive large sums of money in Texas. If there's no trust in place, the court will appoint a guardian of the estate to manage the funds—an expensive and time-consuming process.
• Leaving the designation blank. If there's no named beneficiary, the account typically defaults to your estate—which means it goes through probate and may not end up where you intended.
• Forgetting to update after a life event. Divorce, remarriage, the birth of a child, or the death of a beneficiary—any of these should trigger a review.
• Naming only a primary beneficiary. If your primary beneficiary dies before you and there's no contingent beneficiary listed, the account may default to your estate.

Per Stirpes vs. Per Capita: What's the Difference?

When you name beneficiaries, you may see the option to designate them "per stirpes" or "per capita." These terms control what happens if a beneficiary dies before you.

• Per stirpes means the deceased beneficiary's share passes down to their children. If you name your son as a beneficiary per stirpes and he passes away before you, his children (your grandchildren) would receive his share.
• Per capita means the share is divided equally among the surviving beneficiaries. If one beneficiary dies, their share gets split among the others—not their children.

Most people prefer per stirpes because it keeps assets flowing down their family line, but the right choice depends on your family situation.

Coordinating Designations With Your Estate Plan

Your beneficiary designations and your estate plan need to work together. If your will creates a trust for your children's benefit, but your life insurance names those children directly, the trust never receives the insurance proceeds. The kids get the money outright—possibly at age 18—with no protections.

This is why we recommend reviewing beneficiary designations as part of every estate planning engagement. It's not enough to draft a perfect will or trust if the designations on your financial accounts are pulling in a different direction.

Your Tax Season Review Checklist

Tax season is a natural time to review your designations. Here's what to check:

1. Log into each retirement account and verify the primary and contingent beneficiaries
2. Call your life insurance company and request a current beneficiary listing
3. Check your bank and brokerage accounts for POD and TOD designations
4. Make sure no accounts list a deceased person as beneficiary
5. Confirm that designations align with your current will or trust
6. Update any designations that no longer reflect your wishes

This annual review takes less than an hour and can prevent problems that cost your family thousands of dollars and months of stress.

Contact Dickey Law Group today to schedule a consultation. We serve families throughout The Woodlands, Spring, Conroe, and the Houston metro area. Call (832) 521-4414.