Planning for the future is difficult. Most will choose any excuse to avoid talking about their financial future. If the subject turns to planning for one’s estate, the avoidance level only increases. When topics like attorneys, probate, wills, trusts, and fees become a part of the conversation, whatever willingness was present likely flies away more quickly than a frightened bird.

I was pleased to see Howard Gold’s recent post, “Here’s how to set up a do-it-yourself estate plan.” To be sure, the post does not cover many issues for those with complex financial and family issues. Mr. Gold clearly states that a will or living trust establishes documentation for the legal instructions making your wishes about the disbursement of your estate ironclad. We happily endorse ministries like Financial Planning Ministry, or your chosen attorney for all who seek to practice sound, biblical, financial stewardship through an estate plan.

However, there are impressive, simple to use tools available allowing people to transfer their wealth. One of those is the beneficiary designation, also known as a transfer-on-death designation. This legally binding designation transfers the ownership of an asset to a named beneficiary. Beneficiary designations are widely used for insurance policies, bank deposits, IRAs, 401(k)s, annuity contracts, non-qualified securities, and brokerage accounts. In some states, TOD designations can also be used to transfer automobiles or real estate. One of the greater benefits of beneficiary designations is the assets designated to be transferred do so outside of probate.

There are caveats to consider prior to applying ink to paper naming someone as beneficiary to your hard-earned assets. Beneficiary designations are not fool proof. Unintended consequences lurk nearby. Do not allow the simplicity of the tool to blind you to potential negative implications. The last thing anyone wants to accomplish is to turn an impressive tool into an impending torpedo, wrecking your goals.

First, these binding assignments supersede a will. If you have crafted a will or living trust to name certain charities or non-profit organizations as a recipient of a portion of your estate, you should be aware that all assets distributed through a beneficiary designation will pass outside your written will or trust document. Beneficiary designations should always be coordinated with the estate plans and generosity goals a family has established.

Second, while the beneficiary designation is simple, it is not exempt from the changes and the complexities of estate and tax law. For instance, the SECURE Act passed in 2019 had a striking effect on the transfer of retirement account assets. In prior years, someone could leave IRA or 401(k) assets to their children (of majority age) and they could take out the funds over their lifetime, thus spreading the tax implications for many years. However, under the SECURE Act, children of majority age must withdraw all inherited retirement account assets within ten years. This limitation does not exist if a spouse, or any sibling (within ten years of your age), is named as beneficiary.

Another question to consider before naming beneficiaries is, “What will happen if one of the named beneficiaries dies before I do?” While this may seem unlikely, consider the following possibility. A family named their two married children as beneficiaries of their insurance proceeds and IRAs, and one child passed away shortly before both the elderly parents. Most parents and grandparents would want their assets to pass to the representative grandchildren in such an event. However, unless the words “per stirpes” were included in beneficiary designation, any grandchild of the deceased child would not be included.

The beneficiary designation can also cause problems for annuities, an increasingly popular savings and investment vehicle, a family has enrolled to save for their future. Many families name one spouse as the owner of the annuity, the other spouse as the annuitant, and their children as the beneficiaries, assuming the annuitant would benefit from the savings if the owner died. Unfortunately, under this arrangement, the insurance company would be required to pay the death benefits to the beneficiary children. The children would have ten years to withdraw the funds as income subject to ordinary income taxation. The annuitant, who the family thought would benefit from the money, would have to rely upon the children to give them the after-tax funds. Joint ownership of the aforementioned annuity contract would not eliminate the necessity to disburse the funds to the named beneficiaries in this scenario.

The designation of a beneficiary or adopting a Transfer On Death document is an impressive tool, in spite of the potential pitfalls. We encourage everyone to work to find the simplest, most cost effective, most God honoring means of disbursing your assets! Knowing about the tools available is the first step. Learning about how to avoid creating unintended problems is the second. Acting on what is learned is all that is left!