Which Trumps: Your Will or Beneficiary Designation?

Financial Planning

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Which Trumps: Your Will or Beneficiary Designation?

You have worked hard for your wealth. The last thing you want is for it to go to the wrong person—or even worse, the government—upon your passing. That can happen if your beneficiary designations are not kept current, even if your will is.

Published by Motley Fool Wealth Management Tue, May 24, 2022

read time 6 min read

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You have worked hard for your wealth. The last thing you want is for it to go to the wrong person—or even worse, the government—upon your passing. That’s just what happened to acclaimed singer Barry White. Apparently, his song, "You're the First, the Last, My Everything," proved untrue as he was twice divorced. And while he moved on, he failed to do the same with his designated beneficiaries. The unfortunate result? Upon his death, his second ex-wife inherited everything, while his nine children and live-in girlfriend were left with nothing and were forced to sue White’s ex-wife.1

We know updating your beneficiary designation is not high on your priority list when you’re experiencing a life-changing event. Thus, it’s frequently missed or forgotten.

But here’s the skinny on the importance of keeping who you assign up to date: Beneficiary designations trump your will and trust directives. So, for example, if your life insurance policy still lists your ex-wife, when you pass, she will receive a payout instead of who you want. Changing your will is not good enough; you must amend the beneficiary designation on each account too.

According to the Survey of Consumer Finances, the average inheritance in the U.S. is $46,200 with the wealthiest families transferring on average $719,000.2 You don’t want to turn over in your grave because the wrong person inherited your money. To avoid this, follow these tips.

What is a beneficiary designation?

A beneficiary designation gives you the ultimate say over who will get your assets when you are gone. So it allows you to transfer specific assets—such as a life insurance policy, annuity, or retirement account—directly to your heirs, regardless of what your will says. You can name more than one person and split your assets accordingly.

Another common misunderstanding is confusing primary and contingent beneficiaries. A primary beneficiary is the first person to receive your assets when you pass away. A contingent beneficiary, also known as a secondary beneficiary, is next in line should your primary beneficiary pass away first. You can name as many primary and contingent beneficiaries with their respective percentages as you wish.

Why are beneficiary designations important?

Beneficiary designations can generally be added to bank accounts, investment accounts, retirement accounts, life insurance policies, savings bonds, and other assets.

Your selection for each account is the easiest way to ensure your heirs will receive assets directly. Who can you choose? Spouses, children, other family members, friends, or even charities.

You should review your selections periodically to ensure they still match your wishes. Because remember: Updating your will does not change where these assets go. Assets that have a designated beneficiary override the will.

Thankfully, it isn’t difficult to update your beneficiary designations. When you opened your retirement account or an insurance policy, you submitted your beneficiary designations as part of the application process. You can review and update your beneficiary designations by contacting the financial institution where the specific accounts are held. Many give you the option to update them online, although some may still require you to fill out a paper form and mail it in.

Review your beneficiary designations with legal and wealth advisors

Your beneficiary designations should be part of your overall financial and estate plan. An estate lawyer and wealth advisor can help you understand your beneficiary selections and how your assets will be distributed. And because laws frequently change, our team can help you maintain your estate plan and beneficiaries.

You should review your estate plan on a regular basis, especially with significant changes such as births, deaths, divorces, etc. The important thing is to always be prepared and ensure designations are kept current. While there is no ironclad way to avoid potential disputes, you can greatly reduce the chances and help ease the process for your loved ones.

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Footnotes:

1 kiplinger.com,  August 31, 2018, accessed on May 9, 2022

2 federalreserve.gov Sept. 28, 2020, accessed on May 9, 2022

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