Estate planning red flag: Most of your wealth will pass through beneficiary designations

Estate Planner September/October 2006

No matter how long you agonize over who gets what in your will or living trust, your wishes may not be carried out if the bulk of your estate will be transferred through beneficiary designations.

Many types of assets pass to your heirs on the basis of beneficiary designations, including life insurance, brokerage accounts, IRAs and 401(k) accounts. It’s not unusual for these assets to make up most of a person’s wealth. And the beneficiary designation controls their disposition, regardless of the terms of your will or trust.

Suppose, for example, your living trust provides for all of your assets to benefit your children. If the bulk of your estate is in an IRA, and your spouse is the designated beneficiary, your estate plan may not be what you think it is.

To avoid this result, you might consider designating the living trust as the beneficiary of your IRA. However, if you do so, it’s critical that the trust be designed as a qualified beneficiary so as not to accelerate the income tax on the IRA assets.

To ensure that your wishes are carried out, review all of your beneficiary designations periodically and confirm that they’re consistent with the terms of your estate plan.