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Beneficiary Designations and Estate Planning

A revocable living trust, last will and testament, durable power of attorney and medical directive are the main components of a comprehensive estate plan. However, did you know that another simple one page document can often be the key to your estate planning working as you intended? Sometimes overlooked, beneficiary designations play an important role in the distribution of your property and how your family and loved ones will be taken care of after you are gone. Here’s what you need to know.

Beneficiary designations, also referred to as payable-on-death (POD) or transfer-on-death (TOD), operate as a private contractual arrangement between you and your bank, brokerage and life insurance company or other financial institutions. The institution provides you with a form and you list who you want to receive the account following your death. Your choice can have significant ramifications. For example, in the case of individual retirement accounts,  naming your spouse as the primary beneficiary can result in considerable tax savings; rather than being forced to cash out the entire balance or take larger yearly distributions than needed, a surviving spouse can rollover the funds into his or her own retirement account — allowing for greater tax-deferred growth. Another situation in which beneficiary designations can make a big difference is minor children. If you have minor children, your estate planning documents should contain provisions to hold the property in trust for them in the event you pass away before they reach the age of 18. Naming a minor child individually as a beneficiary of a bank account, retirement account or life insurance policy will cause the funds to pass automatically, and the provisions in your will or trust regarding your minor children won’t come into effect. Consequently, it may be necessary for a court to appoint a guardian to manage the money until the child becomes a legal adult, which is expensive and time-consuming.

Beneficiary designations are a vital part of estate planning. If you are thinking about doing estate planning, be sure to discuss beneficiary designations with your attorney. If you already have a will or trust, it might be a good idea to review the beneficiary designations on all of your accounts and to consider making changes if the beneficiary designations do not fit into your overall estate plan.