Don't Let Your Estate Plan Slip: Beneficiary Designations Matter

In the complex world of estate planning, one critical element often flies under the radar: beneficiary designations. These seemingly simple lines on financial documents can make or break your intended financial legacy, potentially sending your hard-earned assets down an unintended path.

Harry Margolis, author of Get Your Ducks in a Row, warned in an interview that beneficiary designations are more than just checkboxes – they are legally binding contracts that can override even the most carefully crafted will.

Below is an edited for clarity and brevity transcript of the interview with Margolis.

Robert Powell: When we talk about estate planning and the legal documents that you need, one of the items that you may overlook is something called a beneficiary designation. Here to talk with me about that is Harry Margolis, author of Get Your Ducks in a Row.

Harry Margolis: Good to see you again, Bob.

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The importance of beneficiary designations

Robert Powell: This is one of my favorite topics. Sometimes people overlook the importance of reviewing and updating their beneficiary designations. So where to begin?

Harry Margolis: There are many beneficiary designations to consider – IRAs, 401(k) plans, life insurance policies, and various financial accounts. The primary problems arise when people:

• Fail to name beneficiaries, causing assets to go through probate
• Forget to update beneficiary designations over time
• Name beneficiaries from past life stages that no longer reflect their current wishes

Real-world complications

Margolis shared two illustrative cases:

1. Sibling life Insurance case: A brother who had previously named his sister as a life insurance beneficiary before marriage and having children left a complicated legal situation. Despite potential changes in family dynamics, the life insurance policy – as a legal contract – must be enforced as originally written.

2. Retirement plan designation: Another case highlighted the precise requirements for changing beneficiaries. Even with communication and records indicating intent, only a specific formal form could legally change the designation.

Strategic beneficiary planning

Robert Powell: Often, people might name a spouse as a primary beneficiary, with children as contingency beneficiaries. How important is it to name both?

Harry Margolis: It's critical because you never know what might happen. While naming individual beneficiaries is easier, there are alternative strategies:

• Consider naming a trust as a beneficiary
• For retirement plans, be aware of potential tax implications
• If you amend your estate planning documents, ensure beneficiary designations align

Practical recommendations

For those with multiple children – like having four children who might need to individually interact with investment companies – Margolis Harry suggests:

• Use a trust to simplify asset distribution
• Have a single trustee manage interactions with financial institutions
• Ensure equal distribution of assets

Best practices for beneficiary designations

Robert Powell: Are there instances where beneficiary designations can be successfully contested?

Harry Margolis: It's generally difficult. Contracts are typically interpreted strictly, making successful challenges rare.

Key advice for maintaining beneficiary designations

• Review designations every five years
• Update after major life events (divorce, marriage, births)
• Keep copies of beneficiary designations in an accessible location
• Ensure your agent or personal representative knows where to find these documents

Robert Powell: So, add this to your to-do list when creating or revising your estate plan.

Harry Margolis: Definitely.