In this episode of the Good Steward Law and Wealth Podcast, host Ledny Jennings explains why proper beneficiary designations are a cornerstone of effective estate planning. He defines beneficiary designations (including TOD, POD, and naming a human, trust, estate, or leaving it blank) and outlines the probate risks of naming an estate or no one at all. Through real‑world examples, Jennings shows how outdated or missing designations can divert assets to unintended parties—such as a 401(k) that went to a client’s mother instead of his spouse, or an IRA that was split between a son and daughter because a brokerage’s custodial agreement overrode the client’s will. He discusses the tax implications of the SECURE Act’s 5‑year forced distribution rule when no beneficiary is named, versus the 10‑year stretch for a properly named beneficiary. The episode warns against naming minors directly, illustrating how a $500,000 life‑insurance policy could end up in a young adult’s hands without safeguards, and recommends using revocable trusts to impose age limits and protect assets from divorce, creditors, or malpractice. Jennings stresses that a trust is only effective if assets are actually funded into it and that trusts must be drafted as “see‑through” trusts to receive IRAs under the SECURE Act. The episode concludes with a call to action for listeners to review and update their beneficiary designations, ensure they name appropriate parties, and coordinate those designations with a properly funded trust.
Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.
Welcome back to the Good Steward Law and Wealth Podcast. Glad to have everyone here today. And today we are going to talk about the importance of beneficiary designations in your estate plan. Um, and I'll use some real-life examples that have been coming up lately in my practice to kind of show you how this actually plays out in, in the real world. Uh, it seems like in the last few weeks we've had several instances come up that highlighted the importance of making sure you have beneficiary designations on all your accounts. So, First off, what is a beneficiary designation? Well, some people also call it a TOD or transfer on death or a POD, payable on death, but it is a designation where you name someone to inherit your account when you're gone. And this can be anything like a bank account, checking account, savings account, CDs, money market account, but also, and more commonly, it's your IRAs, your 401k, any kind of investment account. And life insurance is really important to have also. So basically, it is a beneficiary designation is when you name a beneficiary on your account, whatever type of account that may be. And you have several options of who and what you can name as a beneficiary. So the first one is you can name a human, obviously, a, you know, a relative, a spouse, a friend, family member, whoever it is, you can name an actual human. Or you can name a trust. So you can name your revocable or irrevocable trust as a beneficiary to your account or policy. Now, there are a couple other options that you can name, which I would never recommend, but one, you can name an estate. So you can just say, I name my estate as the beneficiary. Now, when you do that, when you name your estate, that means you either want it to go via your will, whatever your will says for those accounts, Or you just want it to go what the state law says, um, like your heirs at law. So if you name your estate, then you are in probate and we follow what the probate court says happens to your assets. So I never advise that because we've talked about this before. If you're in probate, your estate plan failed. Um, so we don't want to be in probate. But the other option is you can name no one. So if you don't name an estate, you don't name a human, you don't name a trust, you just leave it blank, then you have named no one. And you can do that. And there are provisions put in. For how things go. Normally that is also the probate process, but I'll give you an example here where they named no one and it just didn't go through probate and went through another unique method that I think everyone should be aware of. But so what happens and why is this important? What are the scenarios that your beneficiaries can have on your estate plan? And I'll start with an example of how each of these play out. So let's just say you do not update your beneficiaries accordingly when life changes or when you open a new account. That is one negative aspect of not having your beneficiaries listed properly. And the example I use is this just happened to us. A husband, well, at the time he was a single man, started working, had a 401(k), set up the account. He didn't have a spouse, didn't have kids, no one like that. So he put his mom as the beneficiary on his 401k. Well, you know, 30, 40 years later, he's had a spouse, kids, you know, pretty big family, but he never updated the beneficiary on his 401k. So when he passed away, the account went to his mom by law. Um, and obviously that is not what he intended because he wanted that account to go to his wife because she needed that to live off of and to have retirement. But that's not what happened. Now, in some instances that may be okay. You know, maybe the mom and spouse get along and they agree and mom gives the account, but that is not always the case. And we see things happen, you know, when money's involved and things don't go as you intend. So the first thing you need to make sure you do with your beneficiary designations is update them. Anytime life changes or you have new family members or you have a new job, whatever it may be, open a new account, you make sure your beneficiaries are updated. Now, the second pitfall I've seen with not naming good beneficiaries is when you name no one. So the downside to naming no one as your beneficiary is obviously you didn't name anyone, so you're going to probate court. Now, one negative to this is when you have an IRA or 401(k) and you name no one, and I talked about this in a previous podcast about how you leave IRAs or 401(k)s to people under the new SECURE Act, so you can go listen to one of our previous episodes where we go really in depth on this, but generally, if you name a beneficiary, say your son or even a trust as the beneficiary to your IRA, they inherit the account and they can stretch the withdrawals out over 10 years. So they have to withdraw the money you leave them in an IRA, but they get to stretch it out over 10 years. And why that's important is because of income tax. They don't have to take the whole income tax hit all at once. They can stretch it out over 10 years. But if you do not name a beneficiary, whoever the law says that account goes to has to take it out within 5 years instead of 10. So it can have a pretty big negative income tax consequence if you do not name a beneficiary. Another example that I've seen, and it goes to show you the, how a will is really not a valuable document and you should never rely on a will in your estate plan. Listen to the very episode I did right before this one. It was on the unimportance of wills in your estate plan. And this example came up because a man had an account at, just, we'll just say Edward Jones as an example, but any big box financial advisor, Ameriprise, whoever it is, they had an account at one of these institutions and did not put a beneficiary on it. It was an IRA. They did not put a beneficiary. Well, the reason he didn't do that is because he said, well, I have a will and I provided in my will that I want all my financial accounts to go to my daughter. He specifically wanted it to go to his daughter because he did not talk to his son. They did not get along. He wanted to leave, did not want to leave his son anything. Well, so he didn't list a beneficiary on that account. And then when he passed away, it turned out that this brokerage had a custodial agreement and a custodial agreement is just the a contract you sign to place your account with this brokerage. And within their custodial agreement, that contract said, if you do not name a beneficiary, we will leave it to your descendants per stirpes. That means they are not even looking at the will. They just look at who your descendants are and leave it to them. That's based on a private contract and a private contract overrides a will. So now all of a sudden this man passed away. He wanted everything to go to his daughter. But instead, because he had this private contract and he did not list a beneficiary, it goes 50/50 between his daughter and his son, and that's not what he wanted. So the importance of naming a beneficiary is shown right there. Just list a name. It saves you all this headache, saves your kids headache, avoids probate, goes to who you want it to go to. Um, so the first one we mentioned is make sure you update your beneficiaries. The second one is make sure you Name someone, don't leave it blank. The third one is to look out for is when you name minors. So, um, let's just say the example, you have a life insurance policy. You know, most people have pretty big term policies when you're young, especially if you have young kids. Um, so you have a $500,000 term life insurance policy, very affordable. You got it in case you and your spouse pass away. You want to make sure your kids are provided for. So, Some people list their kids as beneficiary. Say at the time when they got the policy, their kid's 3 years old. They list that 3-year-old kid as the beneficiary and something happens to mom and dad. The kid is set to inherit that life insurance policy. Now, as you would imagine, they don't hand a 3-year-old a life insurance policy of $500,000. It depends on the state law. Um, but in Arkansas, it would be held for that kid until they are 18. So someone else manages the money and provides for them using that money until they they are 18, but when they are 18, they get that $500,000 life insurance policy outright. And I don't know many people that would want to leave $500,000 to an 18-year-old to do whatever they want to with, because it probably would not have the best outcome. I know it wouldn't have if I would've got that much money at 18. So there's danger in just simply listing a minor as a beneficiary because it goes to them at a young age. So the alternative to that, and why I always talk about how important revocable trusts are, is create a trust and leave the life insurance policy to the trust. Because within that trust, you can put age limits on there. You can put when they get it, what they can do with it, all kinds of stipulations. And I'll go into this a little more in depth here in a second, but I'd wanted to list, you know, so that was the, um, the fourth reason you need to make sure your beneficiary designations are done in accordance with your estate plan. Um, again, the first one was making sure you update it. Second one is making sure you at least name somebody. Third one is do not name a minor. And the fourth one is asset protection concerns. So let's use that same example. You have that $500,000 life insurance policy and you leave it to your kids. Then as soon as it's theirs, you know, when they're 18 or whatever age it is at any point, you know, even if they're 25, You leave it to them, it's theirs. They can do what they want to with it. Now, your son in the example may be very responsible and good with money, but he may get a divorce. And your intention probably is to not leave that $500,000 policy, or at least half of it, to an ex-spouse. You want it to stay with your son and your grandkids. So if you leave it to him outright, it would be open to his divorce. So one way to protect that is in a trust, because if you leave it to him, leave it to the trust for his benefit, it's protected from divorce. Another thing it's protected from is creditors. So say that same son's very responsible. He's a doctor. Well, even doctors get sued for malpractice. So anything you leave him, if it was outright just to his name alone, is open to that malpractice. But if you leave it to him in a trust, it's protected. So no matter what happens in his professional life, it's protected. So I wanted to hit on that just to show the benefits of a trust, because anytime you set up a proper revocable trust, you can leave it to your kids where it's protected from creditors, divorce, bankruptcy, any threat out there, or their own mismanagement. So that highlights the importance of a trust, but also making sure your beneficiary designations are proper within that trust and within that estate plan. Because if you have this big fancy trust set up and nothing goes into it or everything goes outside of the trust, then it does you no good. Because I always tell clients, a trust is just an expensive stack of papers until you put your assets in it. So make sure when you get your estate plan done that they are doing it in accordance with your beneficiary designations and you're planning for both of those together. So in our process, we always start with drafting the documents, executing the documents, but then we take a third step in making sure all of our client's assets get into the trust. And that's an important step that a lot of clients leave out. I can't tell you how many times people come into me with an estate plan or trust drafted by another attorney or one they did years ago and they never updated it. And then I have to tell them, well, this trust doesn't own anything, so it's worthless. You had to make sure your assets actually got in the trust. And one quick note to hit on on that, when we're talking beneficiary designations, especially when it concerns IRAs, it's important to make sure a trust is drafted properly to be able to accept those IRAs. You may have listened to our previous podcast where we talked about this specifically, but if your trust is drafted appropriately, it can inherit any type of account. One example with IRAs and the new SECURE Act, you have to make sure it qualifies as a see-through trust in order to inherit an IRA. IRA. So that's just something to look out for. You don't have to know what all that means or the magic words that need to make it a see-through trust, but you need to make sure your attorney is thinking about that and talking about that with you. So that's the importance of beneficiary designations. If I could say anything in regards to estate planning, making sure your beneficiaries are listed, who you want and how you want, is one of the most important things there can be. So thank y'all for listening to the Good Steward of Law and Wealth podcast, where we consider everything gift, and it's our job to do the best we can with what we've been given.
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