Have You Checked Your Beneficiary Designations Lately?

Most individuals have assets with beneficiary designations, such as life insurance policies and retirement accounts. Although people often think of an estate plan as including a will, trust, and other documents, these assets are an important part of an estate plan. Just as a periodic review of a will and trust is essential to ensure that all the provisions are consistent with current circumstances and wishes, it’s prudent to check beneficiary designations from time to time or whenever a major life event occurs.

Key Takeaways

• Assets with beneficiary designations pass directly to the named beneficiary on the death of the principal, bypassing the estate and the probate process.
• If an original designated beneficiary dies and is not replaced prior to the principal’s death, and there is no contingent or backup designated beneficiary, the property goes into the estate and may be required to pass through probate.
• An Arizona state law, A.R.S. § 14-2804, automatically revokes a former spouse as a designated beneficiary when a divorce is final. The Arizona automatic revocation law does not extend to federally-regulated retirement plans and 401(k)s, which must be revised manually and individually.
• If a minor child is named as a designated beneficiary, using a trust or custodial arrangement is necessary to prevent imposition of a court-supervised conservatorship until the child reaches the age of 18.

What Are Common Assets With Beneficiary Designations

Many individuals have multiple assets with beneficiary designations. Common examples include:

• Life insurance policies
• Retirement accounts, including 401(k)s and IRAs
• Annuities
• Financial accounts with POD (payable on demand) or TOD (transfer on demand) designation
• Arizona beneficiary deeds

An inventory of all assets with beneficiary designations should be maintained on an on-going basis, as part of a comprehensive estate plan. Keeping an up-to-date inventory facilitates review as part of an overall estate plan evaluation periodically or after a major life event. It also provides a clear record of all gifts made through beneficiary designations, for consideration in reviewing the overall distribution of property through the estate plan.

Why Periodic Review of Beneficiary Designations Is Essential

Assets with beneficiary designations are a crucial part of most estate plans, although individuals often overlook their importance. An asset with a beneficiary designation passes directly to the named beneficiary on the death of the principal, bypassing the estate, will, trust, and probate process completely. If a designation becomes invalid for any reason (like the death of the beneficiary), or there is another beneficiary designation mistake, the asset may pass through probate unless there is a contingent or back up beneficiary. This is one important reason why periodic review of beneficiary designations is extremely important.

There are also other reasons why beneficiary designations should be included as part of an overall estate plan review conducted with a lawyer either periodically or upon a major life event. A thorough review ensures that all the designations are effective as desired and that any beneficiary designation mistakes are corrected before it’s too late.

For example, naming a minor child directly as a beneficiary without using a trust or custodial arrangement can result in a court appointing a legal guardian to manage the assets until the child reaches the age of majority. Another concern that may arise with beneficiary designations is making certain that the designations do not conflict with other provisions of an estate plan or goals of the overall plan.

A direct beneficiary designation for an asset overrides provisions in a will or trust created at a different time that purports to name a different beneficiary. As such, an asset with a beneficiary designation can be inconsistent with an estate plan document created either before or after the designation is made. An asset with a direct beneficiary designation can also affect a desired proportionate distribution to a group of beneficiaries made in a will or trust, if the asset with a direct designation is excluded from the calculations.

Reviewing beneficiary designations periodically or after life changes, such as moving to Arizona or getting a divorce, ensures that all parts of the plan are consistent with each other and with the principal’s wishes. The primary life events that should trigger a review of beneficiary designations (and an estate plan) include:

• Marriage, divorce, or remarriage
• Birth or adoption of a child
• Death of a named beneficiary
• A new job with a new retirement plan
• Retiring and rolling over a 401(k) into an IRA
• Moving to Arizona from another state

There are also other circumstances that may prompt a review of an estate plan and an update of beneficiary designations. A periodic check of beneficiary designations with an estate planning lawyer is the best approach to ensuring that necessary changes are made in a timely manner and that beneficiary designation mistakes are avoided.

The Effect of Arizona’s Revocation-On-Divorce Statute

One situation that requires immediate attention to changing beneficiary designations in Arizona is a divorce. Under a specific complex statute, A.R.S. § 14-2804, final entry of a divorce decree by a court automatically revokes beneficiary designations, estate plan gifts, and fiduciary appointments of a former spouse. The revocation-on-divorce provisions are not without limitations, however.

The law only invalidates parts of an estate plan that mention the ex-spouse. Estate planning documents, like a will or trust, are not entirely invalidated. In addition, a specific governing instrument, court order, or contract can override the state law provisions.

One of the most important limitations of the state statute is that federal laws govern employer-sponsored retirement plans, 401(k)s, and similar plans. Federal laws override the Arizona statutory provisions, so the state law revocation does not apply to beneficiary designations of federally-regulated plans. As such, these plans must be separately, manually revised to change the designated beneficiary after a divorce. Failure to update this type of beneficiary designation may result in the former spouse receiving the funds.

The limitations on the state law revocation-on-divorce provisions illustrate a compelling reason for reviewing all beneficiary designations (and the current estate plan) after a divorce, or any other significant life event. A complete estate plan review will catch and correct any problematic beneficiary designations, including those of a former spouse. For recently divorced individuals, relying on a state law to change beneficiaries in any circumstances is a mistake and is not a substitute for proactive review to ensure all assets have the proper beneficiaries designated.

Is It Time to Update Your Beneficiary Designations?

If you haven’t checked your beneficiary designations in a few years, now is a good time to gather all your documents and review them to identify any mistakes or needed revisions. Combining this review with an overall review of your entire estate plan is also a good idea if you haven’t revisited your plan recently, to ensure there are no inconsistencies and that your wishes for the overall distribution are exactly the way you want them.

Talk to an Experienced East Valley Estate Planning Attorney

In the estate planning practice at Peterson Law Offices, PLLC, East Valley attorney Shane Peterson helps clients see the whole picture of their estate plan, by reviewing beneficiary designations along with the will, trust, and other estate documents, to ensure that the whole plan works together toward the client’s overall goals. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.