Trusts & Estates Law

Jayson J.R. Choi

Q: What is a beneficiary designation and why is it important to consider?

A: A beneficiary designation is a document that specifies how certain types of assets, including life insurance, annuities, 401(k) plans, individual retirements accounts (IRAs) and transfer on death accounts, are to be distributed upon the owner’s death.

Upon death, beneficiary designated assets pass directly to your named beneficiaries rather than through the probate process, and accordingly are not governed by your Will, regardless of the terms of your Will.

For example, if prior to your marriage you named your sibling as beneficiary of a life insurance policy, even though your subsequently executed Will may direct that all your assets pass to your spouse, your sibling will inherit the life insurance proceeds if you fail to change the beneficiary designation.

It is important to name a beneficiary rather than rely on the default beneficiary provisions of the agreement governing beneficiary designated assets, which may cause the assets to pass to unintended individual beneficiaries, or to your estate. If the assets pass to your estate, although your Will may set forth your desired dispositive plan, unnecessarily subjecting the assets to the probate process may result in additional estate expenses, expose the assets to creditor claims and result in higher tax liabilities.

What factors should I consider in designating a beneficiary?