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The Beneficiary Designation Issue

Some assets pass through beneficiary designation and that is the only way they can pass. For example, retirement plans like 401(k)’s or IRA’s pass by naming a beneficiary on those accounts. You could name a Trust to be a beneficiary, or you could name individuals, but either way the money will pass based on the beneficiary form.

The same is true for life insurance, where the life insurance payout is paid to the named beneficiary on file with the life insurance company. Again, you can name a Trust to be a beneficiary of life insurance or you can name individuals, but either way the money will pass to the designated beneficiary.

Of course, you can still plan your estate successfully with assets that pass by beneficiary designation, but you have to plan accordingly. The beneficiary form controls over anything that is said in your Will or Trust. That means your Will may say everything passes equally to your children, but if your life insurance policy only names one child as a beneficiary, then only that one child will receive the insurance money. Your Will has not effect on the process. The same is true with Trust terms—they do not control how life insurance passes.

Elements to Consider when Designating Beneficiaries

That means you must consider how you want your beneficiary designated assets to pass and then you must coordinate that with your other estate planning documents, meaning your Will and Trust. At times, a parent may decide to leave the entire life insurance proceeds to one child because they assume that one child will do “what’s right” and share the policy proceeds with the other children. But the named beneficiary is never legally obligated to share any of the proceeds with others. That’s the danger with using beneficiary designations without thinking through all the possible consequences.

The bottom line is to check with a competent estate planning attorney and make sure all of your assets are working together to achieve your desired estate planning goal.