Wills are legal documents that provide instructions as to who receives your assets when you die. But there are other ways to leave an inheritance for a loved one — like through beneficiary designations. Assets with a beneficiary designation are payable on death to the named party, and they can transfer outside of the probate process, unlike a will. According to the Policygenius estate planning survey, only 33.8% of people know that payable-on-death accounts can be received by a designated beneficiary.
You can and should use both wills and beneficiary designations as part of your estate plan, but take care to coordinate which assets should be distributed directly to a beneficiary and which are bequeathed through your will.
A beneficiary designation usually overrides the terms of a will, and you might cause confusion for the people you leave behind if you include something in your will and then name someone else to receive it through a beneficiary designation.
How a beneficiary designation works
Certain assets let you name beneficiaries to receive them after you die. These assets are also called payable-on-death (POD) accounts or transferable-on-death (TOD) accounts, and they can include a life insurance policy, a retirement account, or bank account. Upon your death, the beneficiary can claim the asset you named for them to receive directly from whoever holds it, like the insurance company or bank.
In some states you might even be able to add a beneficiary to a piece of real estate. That means you don’t need a will to leave someone your house.
In order for an asset to pass to the named beneficiary, you must complete the proper paperwork — a beneficiary designation form. You can even include a contingent beneficiary in case the primary beneficiary predeceases you.
→ Learn how to make your account payable on death
Beneficiary designation vs will
A beneficiary designation and a will are both estate planning options that can help pass along money and assets to your heirs. The main difference between a beneficiary designation and a will is that assets with designated beneficiaries can avoid probate, while assets included in a will don’t. Like assets in a living trust, assets with beneficiary attached to them operate separately from a will.
This makes adding a beneficiary designation to an asset an advantageous and convenient way to leave an inheritance, since your loved ones can receive the money or assets with minimal court involvement.
When someone dies, their estate may need to go through probate and that could include proving the will’s validity in court upon their death. The probate process can take time and money — filing fees at the least, and attorney fees if there are issues, like someone who wants to challenge or contest the will. All of this delay how long it takes for assets included in a will to transfer to their rightful beneficiaries.
→ Learn more about probate and how to avoid it
If you include an asset in your will, but the asset already has its own beneficiary designation, the terms of the will can be ignored. For example, let's say your will stipulates that your wife should receive your savings, but you already named your daughter as the beneficiary of your bank accounts. When you die, your daughter will receive the money in the account, because a beneficiary designation takes precedence over the terms of a will. This is why it is imperative to exclude any payable-on-death assets from your will.
→ Find out what else you should never put in your will
Even if your estate consists of assets with named beneficiaries, you still need a will. A will can pass along personal belongings and possessions of sentimental value and also name a guardian for a minor child. You can get started on your estate plan with Policygenius.
What happens if I don’t add beneficiaries?
If you fail to name a designated beneficiary for an asset, it will become part of your estate if you don’t have any measures in place like a will. By writing a will, you can leave instructions as to what happens to the property in your estate, but if you die without one then intestacy law will determine who inherits.
There may be unwanted tax implications for certain assets like retirement accounts if you don't name a beneficiary to receive them. A 401(k) or IRA that becomes part of the probate estate may have to be distributed to beneficiaries according to different terms than expected, resulting in unnecessary income tax for the beneficiaries.
You should consult with a financial advisor if you have questions about estate planning and taxes, including how they work with retirement accounts.
