A well-thought out and properly drafted estate plan should provide a legally enforceable roadmap for the distribution of your estate assets after you are gone, ensuring that your assets are passed down according to your wishes. Throughout your comprehensive estate plan, you will name beneficiaries who will receive specific assets and/or a portion of your estate. Unfortunately, beneficiary choices are often made once and then forgotten for years, which can create serious problems. Outdated or inaccurate designations may unintentionally disinherit a loved one, benefit the wrong person, or cause legal disputes. To keep your estate plan current and working as intended, an estate planning attorney at Bennett | Michael | Hornsby explains the importance of reviewing and updating
beneficiaries in your Tennessee estate plan.
Who Qualifies as a Beneficiary in Your Estate Plan?
While the terms “beneficiary” and “heir” are often used as if they are interchangeable, they have unique meanings. A “beneficiary” is a person, organization, or even a pet that you specifically name to receive assets from your estate while an “heir” refers to someone who inherits according to Tennessee’s intestate succession laws when there is no valid estate plan in place. A beneficiary inherits by choice whereas an heir inherits by law. Beneficiaries may appear in multiple places throughout your estate plan, including:
- Last Will and Testament: Your Will can distribute some or all your assets to beneficiaries of your choosing.
- Trust: Trusts are used for many purposes, including avoiding probate, protecting assets, planning for long-term care needs, and supporting beneficiaries with special needs. A beneficiary is an individual, entity, or even a family pet that is entitled to distributions from the trust assets.
- Payable on Death (POD) or Transfer on Death (TOD) Accounts: Banks, investment firms, and brokerage accounts often allow you to name someone who will automatically take ownership upon your death.
- Joint Ownership: While not technically a beneficiary designation, jointly owned property with rights of survivorship will pass to the surviving owner, so it should be considered when reviewing your overall plan.
- Life Insurance: Policies require you to name at least one beneficiary to receive the death benefit after you pass away.
- Retirement Accounts: IRAs, 401(k)s, and other retirement plans typically pass directly to the designated beneficiary without going through probate.
Why Beneficiary Designations Are So Important
Beneficiary designations are crucial to consider when creating or updating your estate plan because they take priority over instructions in your Will or trust. For example, if your Will leaves your life insurance proceeds to your children, but the policy’s beneficiary form lists your former spouse, the insurance company will pay the proceeds to your former spouse. This “contract supersedes the Will” rule makes it critical to keep these designations aligned with your current wishes.
When Should You Update Beneficiaries?
Estate planning attorneys generally recommend reviewing your overall estate plan every three to five years as a matter of routine. Certain events, however, should prompt a more immediate review of your beneficiary designations in your plan, such as:
- Changes in Relationships: Because relationships change over time, a falling out with a family member or friend should prompt you to review your estate plan and potentially remove them as a beneficiary. Conversely, you may want to add new individuals, such as stepchildren or a new charitable cause, to your plan.
- Major Life Events: Marriage, divorce, the birth or adoption of a child, and the death of a beneficiary should trigger a review of your estate plan to determine if you need to update beneficiary designations. Failure to change designations can lead to assets passing to unintended recipients. For example, not removing a former spouse as a beneficiary after divorce can result in costly litigation or a complete disregard for your true intentions. Be sure to consult with your attorney, however, before removing a former spouse as a beneficiary because the terms of your divorce may prevent you from doing so.
- Changes in the Law: Tax rules, retirement account regulations, and estate planning statutes are not static. Legislative updates may require adjustments to maximize tax benefits or ensure your designations remain legally sound.
- Significant Financial Shifts: Large changes in wealth can affect how you want to distribute your estate. For example, a sudden inheritance, the sale of a business, or a significant loss could all trigger the need to reconsider who should benefit from your assets and in what amounts.
- Aging or Health Concerns: As health declines or priorities change with age, your estate plan may need fine-tuning. Adding contingent beneficiaries can prevent assets from going to unintended recipients if your primary beneficiary cannot inherit.
What Happens If Beneficiaries Are Not Updated?
Sometimes the best way to express the need to do something is to explain what could happen if you fail to do it. In this case, failing to review and update your designations can have serious consequences, such as:
- A former spouse receives an inheritance you no longer intended.
- A deceased beneficiary’s share goes to someone you would not have chosen.
- A child who has reached adulthood is left out of your Will, depriving them of the lump sum you wanted them to receive.
- A disabled beneficiary loses eligibility for government assistance because they were not provided for through a special needs trust.
How to Keep Your Beneficiary Designations Current
To ensure that your estate plan reflects your current wishes, take the time to review and update your beneficiary designations right now if you have not done so recently. Start by compiling a list of all accounts, insurance policies, and estate planning documents that contain beneficiary information and review each one to confirm that the existing beneficiary information is accurate. If you need to make changes, consult with an experienced Tennessee estate planning attorney to effectuate the desired change.
Once the changes have been incorporated into your plan, keep copies of the new documents with your other estate planning documents and provide copies to your Executor, Trustee, and beneficiaries (if appropriate).
Contact a Murfreesboro Estate Planning Attorney
If you have additional questions or concerns about updating beneficiary designations in your Tennessee estate plan, contact an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.
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