Beneficiary designation is an important aspect of the estate planning process, but it’s actually something that’s dealt with outside of your actual estate plan. Further, if your designated beneficiaries don’t match up with the provisions in your estate plan, it could lead to some trouble.

A beneficiary designation is the act of naming the person who will inherit an asset in the event of the account owner’s passing. Some common examples include life insurance policies and retirement accounts. When the account owner passes away, their assets are then transferred to the beneficiary that they designated.

It’s also possible to designate your estate as the beneficiary. Instead of transferring the asset to a person, the asset is transferred to the estate. Then, the asset is distributed according to the provisions in your Trust or Will.

It’s worth noting that the secure act was passed in December 2019 under the Trump Administration. It created new rules regarding required withdrawal amounts from inherited retirement accounts. It should be noted that the term ‘designated beneficiary’ is newly defined as a living person who doesn’t fall into one of the five categories below:

• Surviving spouse
• Child under the age of 18
• Individual with a disability
• Individual who is chronically ill
• Individual within 10 years of age of the deceased

As a result of the SECURE act, any person who falls into one of the above five categories is an ‘eligible designated beneficiary.’ For the purpose of the article, ‘designated beneficiary’ will also include eligible designated beneficiaries. The main thing to note about eligible designated beneficiaries is that they have added benefits relative to designated beneficiaries, such as greater flexibility in withdrawing funds from their inherited assets. This highlights how important it is to do your research before doing your beneficiary designations.

Are There Different Beneficiary Designation Types?

There are different types of beneficiary designations, and the number of types increased with the recent SECURE act. So far, we discussed the difference between an eligible designated beneficiary and designated beneficiary. There are a few more beneficiary designation categories to keep in mind when managing your assets:

• Eligible Designated Beneficiary (EDB): EDBs fall into one of five categories as defined by the 2019 SECURE Act. These beneficiaries have certain advantages over other beneficiary types.
• Designated Beneficiary (DB): A DB is any living person who was named as a beneficiary, but does not fall into one of the five EDB categories.
• Not Designated Beneficiary (NDB): A non-living beneficiary is considered non designated. This can be charities, Estates, and Trusts.
• Primary Beneficiary: The named beneficiary is first in line to receive benefits, and are thus the primary beneficiary.
• Contingent Beneficiary: A Will may outline a contingent person who may receive benefits in the case that the primary beneficiary is deceased, or cannot or will not accept the assets.
• Secondary Beneficiary: This term is used interchangeably with the term contingent beneficiary.

An important thing to note here is that a named beneficiary isn’t always a living person. Per the definition of an NDB (not designated beneficiary), you can arrange to have your assets transferred to your estate. In this case, the Will will include instructions for who will inherit which assets, how much, and so on.

Does a Designated Beneficiary Override a Will?

In general, a designated beneficiary will take precedence over a Will. This is because the entity that manages the account, such as a bank or life insurance company, will transfer the asset to the beneficiary who was named for that specific account. Sometimes, this won’t line up with instructions that were left in a Will.

That’s why it’s so important to make sure that your Will and beneficiary designation won’t cause any conflict. You’ll want to ensure that the provisions in Will are coordinated with the named beneficiaries of those asset-holding accounts or policies. If not, the instructions in your Will may not be executed according to plan.

For those wanting to consolidate and avoid confusion, it’s possible to name your Estate as the beneficiary of your assets. Your Will would then name the specific individuals that these assets should be distributed to, in what proportion, and any other applicable provisions.

Why Set Up a Designated Beneficiary?

Have you made a beneficiary designation on your retirement accounts, savings accounts, and life insurance policy? Not doing so could be a mistake. When someone doesn’t set up a designated beneficiary, your estate automatically becomes the beneficiary. This could be subject to a long, expensive, and burdensome probate process. When designating your beneficiary, be sure to name a contingent beneficiary in case the primary beneficiary is predeceased. It’s also helpful to be as specific as you can. Designate your beneficiaries by name (instead of “my kids”), and be sure to specify how that particular asset will be divided and distributed.

How Do You Designate a Beneficiary?

To designate a beneficiary, you’ll need to follow the instructions provided by the company holding the asset. At times, it will be an easy process, such as simply filling out a web form provided online. Most often, the company will ask you to name a beneficiary when you first open the account. Just be sure to have the full legal name and contact information of your desired beneficiary or beneficiaries.

Keep in mind that designated beneficiaries become active the moment you pass away, and can inadvertently override any provisions about asset inheritance in your Will. It’s helpful to use online tools that will make it easier for you to review and update your estate planning and beneficiary designation documentation.

Beneficiary designation very much sounds like an estate planning term. Although it’s closely related, in this case it’s slightly different. Designating a beneficiary refers to the process of naming an individual who will receive an asset upon your passing. This is done for each individual asset, such as a life insurance policy, through the company that holds the asset. This means that you’ll need to repeat the process with the different entities that hold your assets. Estate planning, however, does play a big role. That’s because the beneficiary designation of an asset overrides your Will by default, if it does not match with the provisions of your estate plan. This is yet another reason why you should make a habit out of reviewing and updating your estate plan regularly.

Tax Considerations For Beneficiary Designations

After you die, your Will will likely be submitted to the court to go through the probate process. This is where the court will confirm the validity of your Will and authorize your executor to start acting as your executor. As part of the probate process, your estate is “taxed”, (well, charged a fee).

This is getting a little technical, but some of your property can live “outside your estate”. Generally, assets that have beneficiaries designated (like insurance policies and registered investments), are the kinds of assets that fall outside your estate. This means the probate fee will not be charged and your beneficiary will receive the benefit directly from the institution, not the executor.

It is possible, in some circumstances, for those assets to become part of your estate. For example, if you don’t name a beneficiary at all, or you list your estate as the beneficiary, then the assets will become part of your estate before being distributed. When this happens, these assets will be subject to probate fees. As a result, your beneficiaries could receive a lower sum than if you had named them as beneficiaries under the policy.

With an RRSP, there are certain tax consequences on your death. Essentially, your RRSP’s value is included as part of your income for the year you died. Tax on this income may be deferred if the beneficiary is your spouse or common-law partner, a child or grandchild under 18 who is financially dependent on you, or a child or grandchild of any age who is financially dependent on you due to a disability.

Mistakes To Avoid When It Comes To Naming Beneficiaries

Here are some of the most common mistakes you can avoid to ensure your beneficiary designations are clear as day for the people you leave behind.

1. You don’t name any beneficiaries, anywhere.

If you don’t create a Will the laws in your province will dictate who gets all of your stuff. More often than not, it’s not the exact distribution that you would choose. In addition, life insurance proceeds and the money in your registered accounts will be distributed according to the same scheme.

2. You haven’t considered tax consequences.

If you name a beneficiary, your life insurance policy’s death benefit passes “outside your estate”. But if you don’t name a beneficiary as part of your actual policy that benefit will form part of your estate, which means it will be subject to tax when it didn’t need to.

3. You forgot to update your Will or other beneficiary forms.

We know this isn’t fun, but when you undergo a major life change such as a divorce, don’t forget to update your designated beneficiaries … everywhere. Otherwise, your ex-spouse could inherit some of your assets.

4. You name only one beneficiary.

It’s okay to name one beneficiary, but it’s not okay if they die before you. If you’re going to leave all your assets to one primary beneficiary, make sure to also name a contingent beneficiary so your assets are guaranteed to be received by a loved one.

Things You Can’t Leave To Beneficiaries In Your Will

Now that you know how beneficiary designations work, here are some things to consider in terms of how they DO NOT work:

• Life insurance policies: Your insurance policy should already list one or more beneficiaries. When you die, your insurance payout automatically goes to the beneficiaries listed in your insurance policy—without any direction from your Will.
• Pension plan policies: As with life insurance policies, pension plan policies also typically already have beneficiaries named.
• Certain jointly owned property: If you are a joint tenant of any asset (like real estate property, or a bank account) your co-owner automatically gets 100% of the asset when you die. This is called the right of survivorship.
• Gifts for pets: Pets can’t legally own anything and therefore cannot be named as a beneficiary. If you want to leave things or money to your pet, leave them to the person you named in your Will to take care of them.

Benefits of a Trust

Benefits of trust are many and varied. A trust is one of the most flexible tools a financial attorney can use. There are various types of trusts available and they can be beneficial to asset protection, income tax planning, and estate planning. The trust that provides the best solution for your needs will depend on a number of different factors.

The living revocable trust is the one used most often. The benefits of a trust like this include: helping dodge probate, reduce estate taxation, and maintain asset management when the owner or initiator of the trust becomes incapacitated or dies. Yes, technically trusts don’t have official owners, but this description makes it much easier to understand. Today we are going to focus on establishing and using a living revocable trust, but first let’s focus on the basic functions of trusts.

A trust is a written agreement that details rules to be followed for properties being held for beneficiaries. The general reasons for setting up a trust are to establish asset protections, reduce or eliminate taxes, and prevent probate. Trusts are places where you can essentially “stow away” property, give the asset held a new identity, and have them gain some special defenses in lieu of a transformation.

The one who initiates the trust may be referred to as a settlor, grantor, or trustor. The one that takes over or currently manages the property is referred to as a trustee, and those that will receive benefits from the property are called beneficiaries. One person may hold all three titles at one time, and if the trust established is revocable, it’s called a grantor trust and receives special tax incentives. Trusts are available in two basic forms: revocable trusts and irrevocable trusts.

Irrevocable trusts offer ironclad asset protection because they cannot be revoked. Their disadvantage is that once you give away the property you cannot get it back. Revocable Trusts can be revoked so they are more flexible with a lesser degree of asset protection.

Revocable trusts don’t offer much in the way of asset protection initially, since the grantor can remove them and take back ownership of the property whenever he wishes. This means that any creditors chasing down the grantors assets can actually put in a court order forcing them to revoke the trust. For example many real estate investors use a common land trust for protection. The common land trust is revocable, so there is little asset protection. There is no way around this problem. Don’t let anyone fool you into thinking land trusts provide any sort of protection. It won’t matter who the beneficiaries are, the creditors will have a right to take the property. With that said, my book, Protecting Your Financial Future can provide some information for asset protection value in living revocable trusts.

Using a Living Revocable Trust

A standard living revocable trust actually comes with various titles, such as: Family trust, A-B trust, C-B trust, and loving trust. These names are created by attorneys and financial planners just to make them sound special or exclusive to their business, but they all work in the exact same way if written up properly. Be careful with this, because even Fortune Magazine reported that only about 1% of the lawyers in America know how to write one successfully. Definitely steer clear of any service that offers to write one up for you online, because they will never meet your needs.

You must educate yourself on family trusts to make sure you’re establishing one that will have the benefits you desire. You’ll also need to do this to learn how to use it effectively once it’s initiated. If you don’t, you will put yourself and your property at risk of probate. Attorneys will never give you this information because it will prevent you from having to pay them fees for their services. They secretly want you to go to go through probate because it means you will have to hire them to perform the needed clean up. Nearly 80% of families that establish family trusts will face probate, simple because they haven’t done their research.

Securing a Family Trust

One of the benefits of a trust is that many things can be done by the grantors of a living revocable trust to make them more secure. They aren’t overly complicated, but they will require a change in thought when it comes to how you title and use the property. For example, you have to give ownership of your property to the family trust, rather than allowing it to be probated upon your death. Most people will be scared to completely give up ownership, but remember that a living revocable trust will still let you have control over the property. If you’re still worried, think about it this way:

When living the single life, you’ll have a checking account in your name only. If you get married, then you probably will change this to a joint account. While your checks and bank cards still work exactly the same as before, ownership belongs to joint tenants. With a family trust, you would be taking this account and switching ownership from joint tenants to the trust. Both you and your partner will be designated at co-trustees. Again, your check and bank cards will work the same as before, except that all of your funds are secure if threatened by creditors.

You really have to switch your mindset when it comes to your property. Instead of being an individual or joint owner, you will now be a trustee. Nothing will be in your name, and you won’t hold ownership anymore. Your possessions are simply owned by the family trust, a separate tax entity. Your way of life will not change, but your mindset will have to if you want to maintain asset protection with a living revocable trust. Trying to retain ownership in any way can cost you thousands or more.

Using a living revocable trust to avoid probate is actually an effective legal trick. However, the trick must be set up just right, or it will have an opposite effect. Families that use it right, will completely avoid all of the problems, expenses, and stress that probate causes.