Wills and trusts are popular estate planning tools, but they aren’t the only options for passing down assets. When assets like life insurance policies, annuities, retirement accounts and bank accounts list beneficiaries, they generally can transfer the asset directly to these beneficiaries upon the death of the asset owner.
As an example, if a decedent had a bank account, it’s possible that they had designated beneficiaries to inherit the bank account upon their death.
These beneficiaries typically can claim the account after the decedent’s death by presenting the bank with their ID and a certified copy of the decedent’s death certificate, but if the bank account did not have a beneficiary designation, it would likely have to pass through a court-supervised process known as probate, which can not only be lengthy and expensive, but cause beneficiaries to face delays in receiving the asset.
Learn more about the beneficiary designation types, the importance of the designation of beneficiary process, and how to contest a designated beneficiary when you suspect wrongdoing.
What Is a Beneficiary Designation?
Beneficiary designations enable assets to transfer directly to beneficiaries following asset owners’ deaths. To make a beneficiary designation, asset owners must name beneficiaries using the protocol laid out by the institution that issued the asset. But keep in mind that not all assets will have beneficiary designations; they are specifically reserved for certain types of assets, which we’ll discuss later in this article.
A designated beneficiary can be a person or entity, such as a charitable organization. The account holder also has the option to name multiple beneficiaries and specify the amount or percentage of each beneficiary’s inheritance. Discover more about the various types of designated beneficiaries and whether they bypass probate in the following sections.
Do Beneficiary Designations Avoid Probate?
Estate assets generally must pass through the probate process, which usually is not true about assets with beneficiary designations. Assets with designated beneficiaries tend to bypass probate entirely. This can provide beneficiaries with significant time and cost savings, since they won’t have to go to court or pay hefty probate fees to receive their inheritances.
Note that while there are many upsides to beneficiary designations avoiding probate, there are downsides as well. For example, because designated beneficiaries generally have the ability to claim assets immediately following asset owners’ deaths, it can be more difficult for interested parties who believe they are entitled to the asset to take legal action to recoup the asset, unless they act fast. The asset also could pass from the institution that issued it to the designated beneficiary without anyone knowing about it.
Types of Beneficiary Designations
It’s crucial to understand the differences between types of designated beneficiaries. This is because the type of beneficiary can affect everything from when the beneficiary can access the asset to which sets of rules will apply.
Explore the various types of designated beneficiaries in more detail in the subsequent sections.
Designated Beneficiaries
A designated beneficiary is anyone who was named by the original account holder as a beneficiary. Any person can be a designated beneficiary, and more than one beneficiary can be named.
While there is nothing in the law to prevent a minor from being designated as a beneficiary, it’s important to keep in mind that they usually will not be able to access the asset until they reach the age of majority, which is 18 in California. A custodian or guardian of the estate generally can be appointed to manage the minor’s inheritance until it can be released to them.
Non-Designated Beneficiaries
Any beneficiary named on a retirement account who isn’t an individual person counts as a non-designated beneficiary. This includes organizations and entities, such as trusts, estates and charities.
Since a non-designated beneficiary does not have a life expectancy in the same way individual beneficiaries do, there are different sets of rules that will apply to them in terms of when and how assets can be distributed.
Primary Beneficiary
A primary beneficiary has the highest priority of all beneficiaries. If they are alive at the time of the asset owner’s death and can be located, they can have the asset in question transferred to them by following the protocols of the issuing institution.
Contingent Beneficiary
Also known as a “secondary beneficiary,” the contingent beneficiary receives an asset with a beneficiary designation only if the primary beneficiary passed away before the asset owner, cannot be located or refuses their distribution.
While naming backup beneficiaries may seem inconsequential, it’s extremely important, since any assets not transferred to a beneficiary become part of the decedent’s estate, which makes them subject to creditor claims and other administrative fees.
Eligible Designated Beneficiary
Eligible designated beneficiaries (EDBs) are a classification of beneficiaries to retirement accounts who have a unique set of rights when inheriting a retirement account by beneficiary designation. Most notably, they have more flexibility when withdrawing funds from their inherited accounts than other types of beneficiaries.
The five categories of EDBs are as follows:
- Surviving spouse
- Minor child (individual under 18 years of age) of the deceased accountholder
- A disabled individual
- A chronically ill Individual
- Any individual not more than 10 years younger than the decedent
If you have questions about the unique rights afforded to EDBs, a qualified probate attorney can answer them.
Transfer-on-Death Beneficiary
A transfer-on-death beneficiary receives an asset upon the asset owner’s death without the asset having to pass through probate. With this type of beneficiary designation, beneficiaries have no control or access to the asset in question while the asset owner is alive.
Assets such as stocks, bonds and brokerage accounts typically have transfer-on-death beneficiaries, but they can also be named to pass down assets such as vehicles and real properties.
Payable-on-Death Beneficiary
A payable-on-death beneficiary stands to inherit the balance of funds on assets such as bank accounts and life insurance policies upon the death of the asset owner. This is arguably the easiest way to collect inheritance; all the beneficiary has to do is show up to the bank with their ID and proof of the decedent’s death before they can collect the assets.
What Assets Have Beneficiary Designations?
Understanding the types of assets that can have beneficiary designations will not only allow interested parties to keep tabs on which of a decedent’s assets are being transferred to beneficiaries outside of the probate process or trust administration, but it will also enable them to make the most out of their inheritance if they stand to receive one. If you’re a beneficiary, consulting with a qualified financial planner or attorney can help you navigate the rights and rules surrounding each type of inherited asset.
Bank Accounts
Bank accounts, including checking and savings accounts, are the most common method of storing money in the U.S. There are more than 4,000 banks in the country, and each of them offers standard savings and checking accounts that can be left to a beneficiary.
For a designated beneficiary on a bank account to claim the asset after a decedent’s death, they will need to present their ID and a certified copy of the decedent’s death certificate to the bank. Once the bank verifies their identity and the decedent’s death, it will release the funds in the account to the designated beneficiary in accordance with the decedent’s specific instructions.
Note that there is no requirement to designate a beneficiary on a checking or savings account. If no beneficiary is designated, the balance of funds in the account will pass to the account owner’s estate after the executor/administrator presents the bank with the required documentation.
A bank account may also be a joint account with rights of survivorship. This type of account automatically goes to the surviving account holder (who often is the surviving spouse) upon the death of the account’s co-owner. Similar to payable-on-death accounts, joint accounts typically avoid formal probate.
Retirement Accounts
Retirement accounts come in many forms, with the 401k and the IRA being the most prevalent examples. The purpose of a retirement account is to provide people with a tax-advantaged way to save money to fund their future retirement.
Examples of commonly used retirement plans include:
- 401(k)
- 403(b)
- Simplified Employee Pension Plan (SEP)
- Thrift Savings Plan (TSP)
- IRA’s
While retirement plans differ in the rates and benefits they offer, one thing they have in common is that they allow the account holder to designate beneficiaries.
Inherited retirement plans may involve required minimum distributions (RMDs), but rules can vary depending upon whether the beneficiary is an EDB or not. If you have a question regarding your inherited retirement account, a probate lawyer or financial adviser should be able to help.
Annuities
Most commonly used to supplement retirement income, annuities are contracts issued by financial institutions that provide a fixed income stream to annuity owners after the premium on the annuity has been paid. An example would be someone purchasing an annuity when they’re working at age 50 so they can collect monthly payments when they’re retired.
If an annuity owner dies before their annuity funds are paid out, the balance of funds may pass to the beneficiaries who were designated on the annuity contract (if the contract allowed for beneficiaries to be designated).
Life Insurance Policies
Life insurance is naturally designed for the purpose of leaving money for beneficiaries. In exchange for the policyholder paying premiums to the life insurance company on a regular schedule, the people who they designate as beneficiaries will receive a death benefit once they die. Certain types of life insurance policies also allow accountholders to access the cash value of their policy before they die.
In order to receive a policyholder’s life insurance death benefit upon the death of the policyholder, the designated beneficiaries on the policy will each need to file a claim with the insurance provider, which the insurance provider will then approve or deny based on the merits of the claim and terms of the policy.
Can a Beneficiary Designation Be Contested?
Any beneficiary designation can be contested, but the person contesting has to have standing and there has to be a valid reason for the dispute. For example, a sibling who is upset because they were excluded as a designated beneficiary when all their other siblings were listed cannot contest a beneficiary designation on that ground, even though it may seem unfair.
It’s important to understand that contesting a beneficiary requires you to prove some form of wrongdoing. Examples include:
- You suspect fraud or forgery was involved in the designation of beneficiaries.
- You believe someone unduly influenced or coerced the asset holder.
- You can prove the decedent lacked capacity to designate beneficiaries or make changes to beneficiary designations.
If you plan to contest a beneficiary designation, hiring an experienced beneficiary attorney will be a key part of the process. Explore the steps of contesting a designated beneficiary in the following sections.
How to Contest a Beneficiary Designation
If you have a strong suspicion that a beneficiary designation was influenced or changed by a bad actor, it’s worthwhile to see if you have a case. Contact a probate attorney and explain your situation to find out whether it’s worth the time and cost to contest a beneficiary in court.
Determine Whether You Have Standing
The first step of contesting a beneficiary is to confirm that you have standing. The easiest way to determine this is to ask yourself whether you would stand to inherit any portion of the asset if the beneficiary designation were set aside. If the answer is yes, then you have standing. If the answer is no, you likely don’t.
People with standing generally include the decedent’s heirs and estate beneficiaries, and sometimes even trust beneficiaries (if the asset in question was included in the trust). Likewise, beneficiaries who were previously designated as a beneficiary but were replaced also have standing to bring a contest. Fiduciaries representing the decedent’s estate or trust (i.e., executors/administrators or trustees) also may be able to contest a beneficiary designation. may be able to contest a beneficiary designation.
Since contesting a designated beneficiary can be a complex process, you’ll want to be absolutely certain you have standing to do so. Contacting an experienced attorney can remove the guesswork from the process.
Find Out Whether Valid Grounds Exist for Your Dispute
Contesting a beneficiary for emotional or personal reasons is not sufficient – you’re going to need proof that there was some type of wrongdoing within the process of naming beneficiaries.
For example, perhaps you can prove that another beneficiary forged the decedent’s signature or influenced them to change beneficiaries before they died.
Here’s an explanation of the grounds for contesting a designated beneficiary:
- Fraud – Someone intentionally misled or deceived the asset owner to designate, change or remove beneficiaries.
- Improper Execution on the Document – When protocols are not followed for designating, changing or removing beneficiaries, it can be a ground for contesting the designated beneficiaries.
- Undue Influence – Someone manipulated or pressured the asset owner into changing the beneficiaries on the asset in their favor.
- Lack of Capacity – The decedent lacked the mental competence to fully understand their actions when they designated beneficiaries or changed them.
- Mistake – The asset owner changed beneficiary designations by mistake or believed themselves to be signing a different type of document.
Each of these options involves completely different strategies and evidence that you’ll need to win in court. To maximize your chances of a favorable outcome, it’s strongly advised that you hire an attorney to help you plan and litigate your case.
Understand the Rules Surrounding the Asset
Assets not only may be governed by state and federal laws, but by the rules of the financial institution that issued them as well, this is why it’s crucial to take time to understand all the protocols involved.
One key example is the process of contesting beneficiaries on a life insurance policy. In most cases, the insurance provider will not get involved in the dispute. Rather, it will provide the death benefit to designated beneficiaries who have valid claims according to the terms of the life insurance contract.
If a dispute needs to be brought to contest beneficiaries, the insurance provider generally will tell the parties involved to file a petition with the court. In the alternative, the life insurance company may itself file an action known as an interpleader action seeking court permission to deposit the disputed death benefits with the court while the contesting beneficiaries litigate their entitlement to the benefit.
The process may be different depending on the assets in question, so it’s critical to speak to the relevant financial institutions before moving forward.
Hire a Beneficiary Attorney
Make no mistake: contesting a designated beneficiary is not an easy process, nor is it a guaranteed victory. Unless you have significant time to dedicate to the case and an extensive knowledge of the law, you’re going to want to hire an experienced probate attorney to help you navigate the dispute.
Having the right attorney by your side not only can help you to have your questions answered along the way, but they can handle virtually every step of the process. This includes contacting the appropriate people, filing petitions with the court, and litigating before the judge.
Additionally, there’s always potential for a settlement, and the right attorney understands how and under what circumstances to use this approach. Ultimately, to stand any chance of a victory in court, you’re going to want to hire a beneficiary attorney who knows the laws of your state and has ample experience litigating beneficiary disputes.
File a Dispute with the Court
Once all preparations are made, it’s time to resolve the matter in court.
If you’re choosing to pursue the matter on your own, you’ll have to present evidence in your petition that proves why the designated beneficiaries do not match what the decedent originally had intended. If you opt to hire an experienced attorney, you’ll have lots of guidance and the entire process will be much easier.
Whether you accept help from an attorney or argue the case yourself, it’s crucial to understand that it’s not a simple process. In short, you’re contesting a contractual document, and it’s safe to assume that the current beneficiaries will do everything in their power to disprove your claims.
FAQs
Our FAQ section will answer some of the most common questions surrounding designated beneficiaries, but feel free to complete our contact form for more in-depth information.
Does a will override a beneficiary designation?
Part of the advantage of designating a beneficiary is that it generally bypasses probate and overrides the contents of a will. Whereas a will must be administered in court, designated beneficiaries may only need to show their ID and a certified copy of the decedent's death certificate to receive their benefits.
However, if the contents of a will are significantly different than the contents of a decedent’s beneficiary designations, it could lead to a dispute. For example, if a will states that all of the decedent’s assets go to his current wife, but he designated his former wife as a beneficiary, it could lead to a potential conflict.
Additionally, if a will was executed after a beneficiary designation had already been made, and the will provides for the asset with the beneficiary designation to go to someone other than the beneficiary named, a dispute could arise regarding who is entitled to the asset.
For beneficiary designations to override a will, it’s important that specific beneficiaries be named; otherwise, they could become a part of the decedent’s estate and be distributed in accordance with the terms of the decedent’s will or state intestate succession statutes.
Does a trust override a beneficiary designation?
A beneficiary designation generally overrides a trust in the same way it overrides a will. Although both trust assets and assets with beneficiary designations bypass probate, the trustee must properly administer a trust in order to distribute assets, while beneficiaries can simply collect assets when they are inheriting them by beneficiary designations.
What is per stirpes beneficiary designation?
While designating beneficiaries, it’s crucial to understand how the designation is phrased. Most designations will be either per stirpes or per capita, and both of these have different rules on how tassets will be distributed in the event that a primary beneficiary doesn’t survive the owner of the asset.
A per stirpes beneficiary designation means that assets will pass down family lines when a beneficiary dies. For example, if a decedent had named his two children as equal beneficiaries, but one of his children predeceased him, leaving two surviving children (grandchildren of the accountholder), then the decedent’s surviving child would receive a 50% share, and the 50% share reserved for the predeceased child would pass equally to the child’s two children.
Conversely, per capita only considers the listed beneficiaries. If the above scenario were applied here, and one child predeceased the decedent, the entirety of the funds would pass to the surviving child and no share would be left for the children of the decedent’s predeceased child.
What is a class designation beneficiary?
A class designation beneficiary provides the decedent the opportunity to make a general statement that covers multiple beneficiaries at once.
A common example of a class designation beneficiary is to state “all children of the marriage of Tom and Becky” instead of naming individual names. By phrasing it this way, the assets will continue to include any children that result from the marriage of the people specified.
A key advantage of using class designation is that it curtails the need to continuously update beneficiary designations.
What are the benefits of a beneficiary designation account?
The key advantages of a beneficiary designated account are the simplicity of creating and collecting the assets, and the fact that it bypasses probate.
When a decedent names beneficiaries to inherit their assets after they’re gone, they can help their loved ones avoid the probate process, thereby saving them significant time and money.
What rules apply to a beneficiary designation for a motor vehicle?
If a person owns vehicles but doesn’t designate them as transfer on death, then they will go into probate along with the property in their estate. However, when a transfer-on-death beneficiary is designated for a vehicle, it allows it to bypass probate so beneficiaries can easily claim it after its owner’s death.
Since vehicles are assets that depreciate over time, it’s a significant advantage for a beneficiary to receive these assets as soon as possible. Otherwise, they may be losing value as probate goes on for months or years.
Contact Keystone with Your Designated Beneficiary Questions
If you need to contest a designated beneficiary or have other beneficiary-related questions, remember that help is available. Simply reach out to Keystone Law for attorneys who are highly experienced at representing beneficiaries in a wide range of cases.
Contact us at your convenience to request a free consultation. We look forward to meeting you.
