Beneficiary Designations: A Good Idea, Or Bad Estate Planning?

beneficiary designations Nov 18, 2016

Many people consider using beneficiary designations on assets such as IRAs, 401ks, investments, life insurance, annuities, mutual funds and other investments, etc. to be estate planning. However, as an elder law attorney, I consider the use of beneficiary designations, for the most part, just plain foolish.


Before I answer that question, I want to make sure you understand what I mean when I say beneficiary designations.  This can be anything from the beneficiaries you name on forms from your financial company or employer, to accounts that have been designated “transfer on death,” “payable on death” and the like. It can also mean making someone a joint owner on an account, which has its own problems, not within the scope of this article.

Also, it is imperative that you understand one of the most common estate planning misconceptions:  

Assets that have beneficiary designations DO NOT pass to your heirs according to your will or your trust!

This is critically important, because many people do not fill out their beneficiary forms in the way that they actually want their assets to pass – or even worse, they don’t understand what will really happen if one of the beneficiaries dies first.

Using Beneficiary Designations May Not Help You Achieve Your Goals

What Are Your Goals for Your Loved Ones?

The use of beneficiary designations accomplishes one goal only: avoidance of probate. Now, many of you reading this are probably saying, “yes, and that is what I want!” Yes, I know that is what you want. I can tell you, however, that after having met with hundreds of people, the real goals are usually not that simple.

The Questions You Need to Ask Yourself Are:

  • Would they give your money to people that you don’t want to have it? Or would they leave it to people you don’t want to have it? (Girlfriend, boyfriend, spouse’s children that aren’t your grandchildren?)
  • Do they have poor spending habits or bad money management skills (but it doesn’t end there – what about their spouse/significant other? Their children?)
  • A young, elderly, or disabled beneficiary being unable to properly manage their own affairs?  Or someone you don’t want managing your money on their behalf? (Ex-wife/husband, etc.?)
  • Someone needing nursing home care?
  • Lawsuits?
  • Creditors?
  • Bankruptcy?
  • Divorce?
  • Addiction?

When You Leave Assets to Beneficiaries You Risk Losing Money

However, you can control this situation. One of the many reasons our clients choose trusts, and you may as well, is that in addition to avoiding probate, a trust is “your rulebook.” Having a properly drafted and funded trust will help you, and your loved ones, avoid every one of the issues above. Don’t leave it to chance, the time to set it up is well spent and avoids heartache later!

Let Us Help You Achieve Your Estate Planning Goals

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The information in this blog is not intended to be, nor should it be, construed as legal advice. It is for informational purposes only. For advice, specific to your situation, consult with a qualified attorney.