Beneficiary Designations Trump Your Will

Jane Young, CFP, EA

Jane Young, CFP, EA

You really don’t want the state deciding how your money is distributed when you die, so be sure to specify how you would like your assets divided.  In Colorado this is most commonly accomplished through the use of a will or beneficiary designations, in more complicated situations a trust may also be used.

Virtually, any financial account can be divided using a beneficiary designation, but it is most commonly used with retirement accounts, life insurance policies and annuities.  Assets distributed through a beneficiary designation will pass to heirs outside of probate.  In addition to assets with a beneficiary designation, assets that are held in joint name or that are designated as “transfer upon death” (TOD) will also transfer outside of probate.

Beneficiary designations and TOD accounts supersede your will, so it is of upmost importance to keep your designations current.  This is especially important when there is a major change in your life such as a marriage, divorce, or death.  Beneficiary designations are legally binding and will be enforced regardless of any changes in your relationships.

You can also transfer your real estate using a beneficiary designation. According to Steve Ezell, a local Estate Planning Attorney, this type of transfer can be accomplished with a “Beneficiary Deed”.  A Beneficiary Deed does not go into effect until death so you will have full ownership of your home while alive and you home will transfer outside of probate.  In an effort to avoid probate, many people deed property to their children and themselves. However, this could create complications if you later decide to sell your home.  It could also affect your possible Medicaid eligibility. 

Probate is the process of legally distributing your assets upon death.  In Colorado, this is usually a relatively simple and inexpensive process.  According to the Colorado Bar Association, the Uniform Probate Code has dramatically simplified probate.   Currently, over 90% of Colorado estates are not court supervised allowing the personal representative to do most of the administration.

Most individuals need a will to control the disposition of everything in their probate estate, this excludes accounts in joint name, distributed by beneficiary or distributed by TOD.  If you want all of your financial assets distributed through your will, leave your beneficiary designations blank or list the estate as the beneficiary. 

When dividing your assets with beneficiary designations or a will, Steve Ezell suggests you consider the use of percentages rather than specific dollar values.  Over time, as you make changes to your various accounts, percentages can help you maintain the desired proportion of assets to be distributed to each heir.  Additionally, identify both primary and contingent beneficiaries, just in case your primary beneficiary dies before you. Should a primary beneficiary predecease you, you will need to specify if their share goes to the remaining beneficiaries or the deceased beneficiaries’ children.

Beneficiary designations and wills are both effective tools, if you utilize them and keep them current.