Neglected Beneficiary Designations Cause Your Estate Plan to Fail

Originally published in 2018. Updated and republished July 2021.

Beneficiary Designations for assets such as life insurance policies, retirement accounts, brokerage accounts, etc. allow you to specifically assign who will inherit those assets when you die. On one hand, Beneficiary Designations are the simplest form of Estate Planning – but at the same time they are one of the biggest reasons why Estate Plans fail. Here is what you need to know about Beneficiary Designations and why they are so important to your Estate Plan:

1. How Do Beneficiary Designations Fit within Your Estate Plan?

One of the biggest misconceptions about Estate Planning is that if you have a Will or Trust – those documents automatically cover all assets that you own. THAT IS NOT TRUE. Whenever I work with a client on their Estate Plan – the first thing we talk about during our initial consultation we call our "Ritchie Legacy Planning Session" is how we need to classify their assets for Estate Planning purposes.

In general, you have three types of Assets for Estate Planning:

1. Probate Assets,

2. Jointly Owned Assets (with right of Survivorship), and

3. Beneficiary Assets (a/k/a Non-Probate Assets).

See the Estate Asset Diagram below.

Here is an explanation of the three different Estate Planning Asset Classifications:

Probate Asset Classification: These are Assets that are:

1. Owned by one person only (aka - not jointly owned); and

2. DO NOT have beneficiary designations.

Examples of Probate Assets are a car, a bank account (without a POD designation) or real estate that is owned just in your name. These assets are called Probate Assets because when you die – they do not automatically transfer to someone else – we have to look at your Will to see who inherits that asset. In Illinois – and most other states - in order to legally transfer title of those assets to your heirs those assets have to go through a court process called “Probate” or those assets have to be eligible for a Small Estate Affidavit. Most people want their estate assets to avoid Probate when they die.

Joint Asset Classification: Joint Assets are assets that are owned jointly by two or more people. An example is if a husband and wife own a bank account or a house jointly. If they own the account as “Joint Owners with the right of survivorship” then when the first spouse dies – the surviving spouse becomes the 100% owner of that property automatically. Joint assets avoid Probate because the assets automatically transfer to the surviving owner via Illinois law.

Beneficiary Asset Classification: These are assets that have Beneficiary Designations available to them. These assets are listed in the Beneficiary Assets Category in the Estate Asset Diagram above. With these assets you can designate a beneficiary who will easily inherit that asset when you die. Assets with Beneficiary Designations avoid Probate.