Why Your Beneficiary Designations Matter

Most people assume that their will is the document that decides where their assets go after they die. For some assets, that’s true. For others, it’s completely wrong. And the gap between those two categories is larger than most Tennessee families realize.

Retirement accounts, life insurance policies, bank accounts with payable-on-death designations, and certain investment accounts all pass directly to whoever is named as beneficiary, regardless of what your will says. A will can’t override a beneficiary designation. The designation wins every time.

How This Can Go Wrong

Think about what that means in practice. You update your will after a divorce to remove your ex-spouse. But you forget to update the beneficiary designation on your 401(k). When you die, that account goes directly to your ex, because that’s what the designation says. Your will is irrelevant to that asset.

Or you name your minor children as beneficiaries on a life insurance policy without realizing that minors can’t directly receive large sums of money. The court appoints a guardian to manage the funds until they reach adulthood. That’s not necessarily who you would have chosen, and it involves court oversight you probably wanted to avoid.

These aren’t edge cases. They’re common. And they’re entirely preventable with proper coordination between your beneficiary designations and the rest of your estate plan.

Patterson Bray PLLC works with Memphis families to make sure every piece of their estate plan is aligned, including the designations that most people forget to review.

What Assets Are Affected

Beneficiary designations control how these assets pass after your death:

• Traditional and Roth IRAs
• 401(k) and other employer-sponsored retirement accounts
• Life insurance policies
• Annuities
• Bank accounts with payable-on-death designations
• Investment accounts with transfer-on-death designations

Combined, these assets often represent a significant portion of a family’s wealth. In some estates, they represent the majority of it. Getting the designations right isn’t a minor administrative detail.

The IRS provides guidance on how beneficiary designations affect the tax treatment of inherited retirement accounts, which adds another layer of reason to get this right.

What Proper Coordination Looks Like

Your beneficiary designations and your estate plan need to tell the same story. If your trust is meant to receive certain assets and manage them for your children, those assets need to be directed to the trust, not to your children directly. If you’ve created a special needs trust for a disabled beneficiary, that beneficiary shouldn’t be named directly on your accounts.

Review your designations any time you experience a major life change. Marriage, divorce, the birth of a child, the death of a named beneficiary, or a significant change in your financial situation are all triggers for a review.

Don’t Forget Contingent Beneficiaries

A primary beneficiary who predeceases you without a contingent beneficiary named can send an account through probate anyway. Naming a contingent beneficiary for every account and policy closes that gap and keeps things moving the way you intended.

A Simple Step With Real Consequences

Updating a beneficiary designation takes minutes. Dealing with the fallout from a misaligned one can take months and create conflict that damages family relationships long after the legal issues are resolved.

If you’re not sure whether your current designations align with your estate plan, connecting with a Memphis estate planning lawyer at Patterson Bray PLLC is a straightforward way to find out and fix anything that needs attention.