What is a beneficiary designation? It is a form you fill out that says who will receive some benefit when you die. Even though that should be a serious consideration, most people do not give it any thought when they sign it. Why? Because you complete a beneficiary designation form at stages in your life when you are not thinking about your estate plan. Think about it. Where are you when you are signing a beneficiary designation? In an insurance agent’s office, at a financial advisor’s office, in a bank, at the employee-benefits office of your job. There is never an estate planning attorney anywhere in sight.
At one stage, you may be starting out in life. Perhaps you started a new job. Or maybe your business just grew to the point where you started a retirement plan. Or maybe you just had your first child. You sign the papers without much thought, so you can get back to the exciting and interesting things in your life.
Years later, you have changed jobs. Or maybe you sold your business, and converted that 401(k) to a regular IRA, or a retirement annuity. Again, papers are put in front of you, without much consideration, you sign them, and move on. This time, maybe you have a niggling doubt in your mind. Why? Because you put your spouse as primary beneficiary and then your kids next. That gives you pause because your spouse has never managed money in his or her life. And your kids are very young. Surely you should think about this. You console yourself that when you have time you will give more consideration to the choices made on that beneficiary designation form.
Next, you have a kid or two going to college. Or a kid getting married. Or maybe, you are approaching retirement. You sign some more papers, again, perhaps considering or not considering the consequences. But telling yourself that you are definitely going to set aside some time to give your estate plan serious consideration.
I’ll share an anecdote to underscore the point. Once there was a man who started out a new job in his twenties. He had just married. He stayed at that job for twenty-five years, vesting in all kinds of retirement and death benefits. It was good job. But some time in between the start of that job, and the third year, he had divorced. Now, twenty-two years later, he had two young children with another partner. And then he died. Guess who got all of his death benefits from the job? The first wife. Why? Because of the beneficiary designation he signed when he started the job.
In the life of your family’s finances, most people do not realize how momentous a simple thing like a beneficiary designation can be. In a sense that form is a plan. By saying who gets this money, you are planning for the future. But it is a future when you are not there to help the people you care about. But is a beneficiary designation a good plan? Even if you are content that you have designated the right persons, should you feel like you have an estate plan?
The thing to know is this: a beneficiary designation is a straight shot to your beneficiary. Using a beneficiary designation as an estate plan is like trying to hit a target with a rifle. But the target is attached to something across the street – a car, or a tree. And the rifle is on a timer. That rifle is going to go off any time between now, and twenty to forty years from now. What is the chance that rifle is going to hit the target? Not very good. And that is the same thing with a beneficiary designation as an estate plan. It is not likely to hit the target. The target in this case, is your estate planning goals.
In estate planning it is often the simplest of things that can be the most impactful. One of the most well understood documents that is completely misunderstood, in my experience, is the beneficiary designation. Why? Because a beneficiary designation is not an estate plan. A plan has contingency instructions in it. A plan defines people for their role in your life, and not necessarily by their name. A plan provides protections for the people you care about, based on the vulnerabilities that you know they have. None of that can be accomplished with a beneficiary designation. And yet, that beneficiary designation may be directing the immediate payout of a huge percentage of the net worth of your estate.
Before you complete a beneficiary designation, you should have an estate plan. That means setting goals, and getting advice on how to achieve them.
Thanks to our friends from Penbay Estate Planning Law Center for their insight into beneficiary designations.