Can a Beneficiary Designation Override Your Will in New Jersey?
One of the more common misconceptions about estate planning is that once you've signed a will, you've established exactly who will receive your assets when you pass away. After all, that's generally what people think of when they hear the word "will." It's a document that explains who inherits your property, who will be responsible for handling your estate, and how everything should be divided.
What many people don't realize is that a significant portion of their assets may never be distributed according to their will at all. Retirement accounts, life insurance policies, and certain bank and investment accounts often have beneficiary designations that determine who receives those assets upon death. These designations can remain in place for decades, and they generally aren't affected when someone creates a new will or updates an existing one.
As a result, it's entirely possible to have a properly prepared estate plan that doesn't accomplish what you intended because of an old beneficiary designation you may have forgotten about years ago.
What is a beneficiary designation and how does it work?
Most people have named beneficiaries at some point, even if they don't specifically remember doing so. When you enroll in a 401(k) through your employer, purchase life insurance, or open certain financial accounts, you're typically asked to identify the person or people who should receive the funds when you pass away. Some bank accounts also allow you to establish payable-on-death (POD) beneficiaries, while certain investment accounts offer transfer-on-death (TOD) designations.
These arrangements are generally intended to make things easier for your beneficiaries. Rather than having to wait for assets to pass through probate, the named beneficiary can typically claim the account directly from the financial institution by providing the necessary documentation. In many situations, this works perfectly well, particularly when the beneficiary designation is consistent with the person's overall estate planning goals.
The concern arises when the beneficiary designation no longer reflects your wishes. These instructions generally operate independently of your will, so updating your estate planning documents doesn't automatically change who will receive the accounts.
Doesn't my will determine who receives my assets?
Not necessarily. A will generally controls assets that become part of your probate estate. Accounts with valid beneficiary designations usually pass directly to the named beneficiaries, regardless of what your will says.
For example, suppose John is a widower with three adult children. He owns a home, maintains several bank accounts, and has a $300,000 life insurance policy. John meets with an attorney and prepares a will leaving his estate equally to his three children, which is exactly what he wants.
What John has forgotten is that when he purchased his life insurance policy twenty years earlier, he named his oldest daughter as the sole beneficiary. At the time, she was his only adult child, and he figured he would update the policy eventually. Unfortunately, he never got around to it.
When John passes away, the insurance company pays the entire $300,000 directly to his oldest daughter. The assets passing under his will are divided equally among all three children, but the life insurance proceeds are generally not included in that distribution. His other children may reasonably believe their father intended everything to be divided equally, and his oldest daughter may agree with them, but she may have no legal obligation to share the insurance proceeds with her siblings.
Depending on the family's relationships, this might be resolved without much difficulty. It could also lead to resentment, disagreements, or even litigation over what John actually intended. All of this could have been avoided by reviewing the beneficiary designation when John prepared his will.
What about beneficiary designations after a divorce?
Divorce is another situation where outdated beneficiary designations can become particularly important. It's not uncommon for someone to name their spouse as beneficiary of a retirement account or life insurance policy early in their marriage and then forget about the designation entirely. Years later, the couple divorces, but neither person thinks to revisit those accounts.
New Jersey law generally revokes certain beneficiary designations benefiting a former spouse after a divorce. However, the rules contain exceptions, and federal law may govern some retirement plans and other benefits. For example, an employer-sponsored retirement plan may be subject to federal rules that affect whether a former spouse remains entitled to receive benefits, regardless of what someone assumes New Jersey law would require.
For these reasons, I recommend reviewing all beneficiary designations during and after a divorce, along with updating your will, powers of attorney, and other estate planning documents. Relying on the law to correct outdated designations can create unnecessary uncertainty for your family.
Should you name your minor children as beneficiaries?
This is another area where I often see families make decisions that seem perfectly reasonable at first glance but can create complications later. Suppose a married couple with two young children purchases a $1 million life insurance policy. Their intention is to make sure that if something happens to both parents, there will be enough money available to raise the children, pay for their education, and provide financial security as they grow older.
When completing the paperwork, they name their children as equal beneficiaries. The issue is that minor children generally cannot independently receive and manage substantial financial assets. Depending on the circumstances, someone may need to become legally authorized to manage those funds until the children reach the applicable age.
There's also a second concern. Even once the children are old enough to receive the money outright, the parents may not want an eighteen-year-old to suddenly have unrestricted access to hundreds of thousands of dollars. For some families, that might not be a concern, but for others, particularly when the amount involved is substantial, it can be a very important part of the planning conversation.
One solution is to establish trusts for the children and coordinate the beneficiary designations so the proceeds can be managed according to the parents' instructions. This allows the parents to select someone responsible for managing the funds and determine how and when distributions should be made.
Can a trust be named as a beneficiary?
Yes, and in some circumstances it can be a very useful planning tool. For example, parents who establish trusts for their children may want life insurance proceeds or other financial assets to be directed into those trusts rather than distributed directly to the children. This can also be helpful in blended families, where someone may want to provide financial support for a surviving spouse while preserving an inheritance for children from a previous relationship.
However, there are some important considerations, particularly when dealing with retirement accounts. IRAs, 401(k)s, and similar accounts are subject to rules governing how inherited funds are distributed and taxed. Naming a trust as beneficiary can affect those rules, and the consequences will depend on how the trust is structured and who the beneficiaries are.
I generally recommend that clients avoid making significant changes to retirement account beneficiaries without first reviewing how those changes fit into their estate plan and, when appropriate, discussing the tax implications with their accountant or financial advisor.
When should beneficiary designations be reviewed?
Ideally, beneficiary designations should be reviewed whenever you're creating or updating an estate plan, as well as after significant changes in your family circumstances. Marriage, divorce, the birth of a child, or the death of a previously named beneficiary are all good reasons to take another look.
It's also worth reviewing retirement accounts from previous employers and older insurance policies. These are often the accounts people forget about, particularly when they haven't made changes in many years. In addition to checking who you've named as the primary beneficiary, you should consider whether you've named contingent beneficiaries who would receive the account if the primary beneficiary is no longer living or otherwise cannot receive it.
The review itself usually isn't especially complicated. Most financial institutions have a relatively straightforward process for checking and updating beneficiary information, although the appropriate designation may require some thought.
Final Thoughts
When I meet with clients to discuss estate planning, we spend time reviewing their assets and how those assets are owned. This isn't simply to determine the value of someone's estate. It's also because the way an asset is titled, or the beneficiary designation associated with it, can have a significant impact on what happens after death.
A person can have a well-drafted will or trust and still end up with an unintended result if their financial accounts haven't been coordinated with the plan. Fortunately, these issues are often relatively easy to address once they've been identified. Sometimes the solution is as simple as updating an old beneficiary designation, while other situations may require additional planning, particularly when minor children, blended families, or substantial retirement assets are involved.
If you're preparing an estate plan or haven't reviewed your existing beneficiary designations in several years, it's worth making sure that everything is working together the way you intended. I'd be happy to meet with you, review your goals, and help determine what planning makes the most sense for your family.
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