One of the biggest surprises people have when they start learning about estate planning is discovering that a will doesn’t control everything they own.
In fact, you can have a professionally drafted will that clearly explains exactly how you want your assets distributed, and some of your property may still never pass through your will at all.
One of the most common examples is your bank account.
People are often shocked to hear this because they assume that once they create a will, every asset they own automatically follows the instructions in that document. Unfortunately, that’s not always how it works.
The truth is that many financial accounts have their own built-in rules for who receives the money after the account owner passes away. Those rules often take priority over what your will says.
It All Comes Down to Beneficiary Designations
Many bank accounts, investment accounts, retirement accounts, and insurance policies allow you to name a beneficiary. A beneficiary is simply the person who will receive the account when you die.
If you’ve named someone as the beneficiary, the financial institution generally pays that person directly after your death.
The account does not become part of your probate estate simply because you have a will.
Even if your will says something completely different, the beneficiary designation usually controls.
This is one of the most misunderstood parts of estate planning because people naturally assume that a will overrides everything else. In reality, beneficiary designations are often legally separate from your will.
Where This Commonly Happens
Bank accounts aren’t the only assets affected by beneficiary designations.
Some of the most common examples include:
- Payable-on-Death (POD) bank accounts
- Retirement accounts such as IRAs and 401(k)s
- Life insurance policies
- Certain investment or brokerage accounts
- Transfer-on-Death (TOD) accounts, where available
Each of these accounts allows you to tell the financial institution exactly who should receive the funds upon your death.
Because the institution already has those instructions, the money is typically transferred directly to the named beneficiary without looking to your will for guidance.
Why This Can Create Problems
Imagine this situation.
You have three children, and your will says that your estate should be divided equally among all three.
Years ago, however, you opened a savings account and named only your oldest child as the payable-on-death beneficiary. Maybe you intended to change it later. Maybe you simply forgot it was there.
When you pass away, that savings account generally goes entirely to your oldest child.
It doesn’t matter that your will says everything should be divided equally.
It doesn’t matter that your family believes you intended everyone to receive the same amount.
The beneficiary designation usually controls that particular account.
Now your oldest child receives the entire savings account in addition to one-third of the remaining estate. That may create confusion, disappointment, or even conflict among your children, despite your best intentions.
Situations like this happen more often than many people realize.
Beneficiary Designations Should Be Reviewed Regularly
Life changes over time, and your beneficiary designations should change with it.
People often update their wills after major life events but forget to review the accounts that pass outside of the will.
Some common reasons to update beneficiaries include:
- Marriage
- Divorce
- The birth of children or grandchildren
- The death of a beneficiary
- Changes in family relationships
- Changes to your overall estate plan
It’s surprisingly common for someone to discover an outdated beneficiary designation years after it was completed. Sometimes an ex-spouse is still listed. Other times, a parent or sibling remains on an account simply because no one remembered to update the paperwork.
Reviewing these designations every few years, or after any significant life event, can help ensure they still reflect your wishes.
Your Estate Plan Should Work Together
One of the biggest goals of estate planning is making sure all of your documents and financial accounts work together as one coordinated plan.
Your will is important.
Your trust, if you have one, is important.
Your powers of attorney are important.
But your beneficiary designations are just as important because they determine where many of your most valuable assets will go.
When everything is coordinated, your estate plan is much more likely to carry out your wishes exactly as you intended. When beneficiary designations and estate planning documents conflict, however, the results can be unexpected and sometimes frustrating for the family members left behind.
The Bottom Line
A will is an essential part of many estate plans, but it isn’t the only document that determines what happens to your assets. Beneficiary designations on bank accounts, retirement accounts, life insurance policies, and other financial accounts often control who receives those assets, regardless of what your will says.
That’s why it’s so important to periodically review both your estate planning documents and your account beneficiary designations to make sure they’re all pointing in the same direction.
If it’s been several years since you reviewed your estate plan, or you’re not sure whether everything is coordinated properly, now is a great time to take another look.
If you need assistance reviewing your estate plan or creating one that reflects your goals, we’d be happy to help. Schedule a consultation with our office today. Check out our YouTube channel for more discussions about estate planning and probate at https://www.youtube.com/@dallawfirm.
