When it comes to estate planning, understanding the differences between beneficiary designations and wills is crucial for ensuring that your assets are distributed according to your wishes. Beneficiary designations are typically used for financial accounts like retirement plans and life insurance policies, allowing these assets to bypass the probate process and be transferred directly to the named beneficiaries. On the other hand, a will is a legal document that outlines how you want your assets distributed and can include instructions for guardianship of minor children and other personal wishes.
A financial advisor can help ensure that you have a holistic estate plan.
What Is a Beneficiary Designation?
A beneficiary designation assigns a person or party to receive benefits from a financial product, such as a retirement account or life insurance policy. For instance, say you have life insurance with a $500,000 payout. If you pass away, your insurance company fulfills the policy by distributing money to your designated beneficiary (the person, people, or entity you define in your policy). You might list your spouse, children or siblings as beneficiaries. You can also choose a charity or nonprofit organization to receive money from your policy.
Some financial products allow you to assign two types of beneficiary designations: primary and contingent. As the name suggests, your primary beneficiary has priority in your list of beneficiaries. In other words, if you pass away, the insurance company or financial institution will attempt to send payment to your primary beneficiary first. If your primary beneficiary doesn’t respond to the communication or is no longer alive, the company will try to distribute payment to your contingent beneficiaries.
What Is a Will?
A will is a legal document that outlines how a person’s assets and affairs should be handled after their death. It serves as a crucial tool in estate planning, ensuring that your wishes are respected and your loved ones are taken care of according to your instructions. Without a will, the distribution of your estate is left to the state’s intestacy laws, which may not align with your desires.
A single person can create a will, and spouses can create a joint will to describe where they want their assets to go. While a will can eliminate ambiguity about how your family should divide up your possessions, your will still must go through probate court. This process involves a judge reviewing your will and distributing possessions accordingly.
Having a will is essential for anyone who wants to have a say in how their estate is distributed. It provides peace of mind, knowing that your assets will be allocated according to your wishes. Moreover, a will can help reduce the time and expense associated with probate, the legal process of settling an estate. By clearly outlining your intentions, a will can also help prevent family conflicts and ensure that your legacy is preserved.
Beneficiary Designations vs. Wills: Key Differences
Beneficiary designations and wills share specific characteristics, such as helping you define who should receive money from your estate after you pass away. However, they aren’t identical, and understanding the differences can help you create a thorough estate plan:
- A beneficiary designation is for one asset: Beneficiary designations apply to specific accounts and products, including life insurance policies, annuities, brokerage and retirement accounts. Meanwhile, your will describes your entire estate, including assets with designated beneficiaries.
- Specific companies require beneficiary designations for their products: On the other hand, a will is a document you voluntarily create.
- Beneficiary designations can override intentions stated in your will: For example, suppose your child is the primary beneficiary for your 401(k), but you state in your will that you would like the money to go to your sibling. In the event of your death, the money would go to your child.
- Wills aren’t necessary for beneficiary designations to kick into action: On the other hand, say you don’t have any financial products with beneficiary designations. In this case, passing away without a will means your relatives and the court will distribute assets without any guidance from you.
Understanding the differences between beneficiary designations and wills is essential for effective estate planning. While beneficiary designations offer a straightforward way to transfer specific assets, a will provides comprehensive control over your estate. By carefully coordinating these tools and seeking professional guidance, you can create a robust estate plan that meets your needs and protects your loved ones.
Does Beneficiary Designation Overrule a Will?
In the legal hierarchy of estate planning, beneficiary designations often overrule a will. This is because they are considered a contract between you and the financial institution, and contracts generally take precedence over wills.
For example, if your will states that your estate should be divided equally among your children, but your life insurance policy lists only one child as the beneficiary, the insurance proceeds will go solely to that child. This underscores the importance of regularly reviewing and updating your beneficiary designations to ensure they align with your overall estate planning goals.
Failing to update beneficiary designations can lead to unintended consequences. Life changes such as marriage, divorce, or the birth of a child may necessitate updates to your designations. If these are not updated, assets may be distributed in a way that no longer reflects your wishes.
To avoid conflicts between your will and beneficiary designations, it is essential to coordinate them as part of a comprehensive estate plan. This involves reviewing all your financial accounts, insurance policies, and retirement plans to ensure that the beneficiary designations are consistent with the provisions in your will.
Can an Executor Override a Beneficiary?
While executors have significant authority in managing the estate, their power is not absolute. They must adhere to the terms set forth in the will and comply with state laws governing estate administration. Executors cannot arbitrarily change the will’s provisions or deny beneficiaries their rightful inheritance. If a beneficiary believes an executor is acting improperly, they can seek legal recourse through the probate court. This ensures that the executor remains accountable and that the beneficiaries’ rights are protected.
Conflicts between executors and beneficiaries can arise, often due to misunderstandings or perceived mismanagement. For instance, beneficiaries might feel sidelined if they are not kept informed about the estate’s progress. To mitigate such issues, open communication is essential. Executors should provide regular updates and be transparent about their actions. If disputes escalate, mediation or legal intervention may be necessary to resolve the conflict and ensure the estate is administered fairly.
Do You Need a Will?
Although it doesn’t create unbreakable conditions for your assets, a will is an essential part of your estate plan because it expresses your intentions for your possessions. A will by itself may not be sufficient for ensuring your beneficiaries receive assets in the manner you wish.
Still, it’s a foundational legal document that guides your executor and the probate process after you pass away. You might need a living trust and beneficiary designations to supplement a will, but the will is the centerpiece for declaring your final wishes. Talk to a legal expert to know what you personally might need.
Bottom Line
A beneficiary designation is mandatory for insurance policies, annuities and retirement products. It defines a specific beneficiary that a will can’t change. On the other hand, a will contains your desires for your entire estate. While a will usually contains numerous beneficiary designations for your possessions, a beneficiary designation for a financial product will supersede your will in the event of a discrepancy. Therefore, it’s an excellent idea to ensure the beneficiary designations within your will align with the designations of your life insurance policy and other financial accounts.
Estate Planning Tips
- A financial advisor can help you create a thorough estate plan that accounts for various beneficiary designations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- An attorney is an excellent resource for creating a will. However, you can create a will online if you want to save money and feel confident doing it yourself.
- Don’t forget to review and update your estate plan from time to time. Some experts recommend doing so every three to five years. Regardless of how often you update your estate plan and will, it’s especially important to take this step after major life events like having a child or inheriting money.
Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/simpson33, ©iStock.com/shapecharge