The Critical Role of Beneficiary Designations (Bert Kell Commentary)

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We’ve all done it. At some point we’ve gotten an insurance policy or opened an account that asks for a beneficiary. We’ve filled in the name of a trusted loved one and thought that was enough. And for many of us, it will be. However, the significance of beneficiary designations should not be underestimated.

Beneficiary designations, typically associated with retirement accounts, life insurance policies and investment accounts, dictate who will receive the assets upon the account holder’s passing. Despite their seemingly straightforward nature, beneficiary designations can be overlooked or neglected, leading to unintended consequences and potentially disrupting the financial well-being of loved ones.

Financial advisers often emphasize that reviewing and updating beneficiary designations regularly is crucial, especially during significant life events such as marriage, divorce, births or deaths in the family. Failing to do so could result in assets being distributed to unintended beneficiaries, leading to disputes, legal battles and financial hardships for heirs.

A trust can be set up with comprehensive language to cover various contingencies that might arise. The trust can also have language that specifies how you want the funds distributed.  

A huge advantage is that a trust can provide creditor protection for your beneficiary in the event they were to go through a divorce, bankruptcy or a lawsuit. This makes the trust-as-beneficiary option the best plan when large sums of money will be inherited and you want to make sure the assets are used for the beneficiary as you intended. One of the disadvantages of beneficiary designations is that the beneficiary has no limitations on how the inheritance is to be used, and since it is going into the beneficiary’s name, there is no creditor protection that a trust can provide.

Beneficiary designations are important because they supersede instructions outlined in wills or trusts, making them a vital component of comprehensive estate planning. One thing you want to avoid, if possible, is probate. Probate is a court proceeding that oversees deceased people’s assets that are in their name only without a beneficiary designation. It can take years to go through probate and have assets distributed to beneficiaries. By ensuring alignment between beneficiary designations and estate planning documents, i.e., trusts, individuals can mitigate potential conflicts and provide clarity and specific instructions regarding asset distribution.

While end-of-life planning can be sensitive and uncomfortable, regular communication and collaboration among family members is important to ensure everyone understands the implications of beneficiary designations and other estate planning documents. Open dialogue can help prevent misunderstandings and ensure alignment with the account holder’s intentions.

As many in this industry often say, “If you have two cents and two relatives, you have wealth to manage.” By proactively reviewing and updating these designations, individuals can protect their loved ones and ensure a seamless transfer of wealth, thus securing their financial legacy for future generations.

Bert Kell  is a trust officer with Arvest Bank and may be reached at hkell@arvest.com.