Although your Will or Revocable Trust governs the distribution of many or most of your assets, certain assets — such as retirement plans, insurance policies, and bank or brokerage accounts — require you to name a beneficiary. This can be an advantage, because when you die the funds can pass directly to your beneficiary without going through probate. But to avoid unpleasant surprises, it is critical not only to choose your beneficiaries carefully, but also to name contingent beneficiaries in case your primary beneficiary dies before you.
Suppose a beneficiary predeceases you but you do not get around to updating the beneficiary form before you die – if you have not named a contingent beneficiary, then the disposition of the funds depends on the type of asset.
For retirement plans, the plan document might call for the funds to go to your spouse or, if you are not married, to your estate. Leaving retirement plan assets to your estate can have undesirable consequences. For one thing, they will pass according to the terms of your Will, which may be contrary to your wishes. Plus, they may have to be distributed and taxed under a five-year rule, depriving your beneficiaries of opportunities to defer those taxes for 10 years or more.
For other types of assets, the funds will likely end up in your estate, which can lead to unfortunate results. Suppose, for example, that your Will leaves your entire estate, valued at $1 million, to Child A. You also have a $1 million life insurance policy naming your Child B as beneficiary. If your Child B predeceases you and you have not updated the beneficiary designation or named a contingent beneficiary (your grandchild, for example), then Child A will receive everything, effectively disinheriting Child B’s family.
If you have questions and would like to speak with an estate planning attorney, please consider contacting one of our firm’s knowledgeable and experienced Estate Planning Attorneys for more information.