Do's and Don'ts of Naming a Beneficiary

Life insurance and retirement plans compose the largest part of the estate for many people.  Carefully designating beneficiaries on these contracts is just as important as making a will.   Your life insurance, IRAs, annuities, and retirement plans will pass to whomever you have designated as a beneficiary.  The will does not operate on these assets unless you designate your estate as the beneficiary.

Admittedly, it is confusing and a moving target.

When you started work, were you married?  Did you name your mother as beneficiary of group life insurance provided by your employer?   How many children did you have when you bought an annuity?  Did you name the children individually?  If you did, children born after that date would not be beneficiaries.  Do you really want minor children to be named as beneficiaries so that a court-appointed guardian has to be named to accept the money for them?  All of these questions should be addressed as
part of your estate planning process.

Changes of beneficiary are easy to make.  You must request a change of beneficiary form from the company and fill it out in accordance with their directions.  Most of these forms provide a small blank spaces to write a designation, but don't be a prisoner of the form!  If your designation is longer or more complicated, attach a sheet.  You are not limited in the disposition of your $500,000 IRA just because the blank on the form isn't long enough to fill in what you want.

Most lawyers who do estate planning ask clients to bring beneficiary designations in for review as part of the estate planning process.

If changes are necessary, explicit instructions are given for how the new beneficiaries should be named; and, in some cases, the lawyer prepares the change requests herself as part of the legal services provided.  Think about it.  The lawyer drafts the will. If there is a large asset that passes outside the will, don't you want the same care, tax
planning, and advice for its disposition?

DONT take the advice of the clerical staff at the financial institution about whom you should designate as a beneficiary.  Follow the directions given by your attorney.  If you run into problems, consult the attorney.

DON'T name minors as beneficiaries of any contractual benefit.  If you die while they are still minors, they will not be able to access the benefit without the expensive and burdensome procedure of having a court appointed guardian.  You may use language in your beneficiary designation to allow your Executor to name a custodian of the estate of any minor beneficiaries, therefore avoiding a court appointed guardian.  It can take over fifty words to state it correctly.  You should consult an attorney to articulate such a designation.

DON'T name a child with special needs as a beneficiary.  This can cause the child to lose government benefits.  These benefits should be payable to a special needs trust.

Beneficiary designations
for retirement plans and IRAs are almost a science unto themselves.  First, the pay-out options provided by the particular plan must be determined.  Then the income tax and estate tax repercussions must be taken into account.  If qualified plan benefits or IRAs are a substantial part of your estate, you need to have the help of a financial professional who is familiar with these matters.


Patti S. Spencer, Esq., is a nationally recognized trusts and estates attorney and author. Her areas of concentration include trusts, estate administration, estate settlement, estate planning, inheritance tax, and tax planning. She is the founder of Spencer Law Firm in Lancaster, Pennsylvania, and a Fellow of the American College of Trust and Estate Counsel (ACTEC). Before founding Spencer Law Firm in 1996, Ms. Spencer was the head of the Personal Trust Department at a regional Pennsylvania bank.

Ms. Spencer is the author of "
Pennsylvania Estate Planning, Wills and Trusts Library: Forms and Practice Manual," (Data Trace, 2007), "Your Estate Matters," (AuthorHouse, 2005), and a weekly column entitled "Taxing Matters," published in the Lancaster Intelligencer Journal. She holds an LL.M. post-graduate law degree in Taxation from Boston University School of Law and is a member of both the Pennsylvania and Massachusetts Bars. Ms. Spencer can be reached at patti@spencerlawfirm.com or 717-394-1131. Learn more at www.spencerlawfirm.com.