Many people spend time creating a will because they want their wishes to guide what happens to their property. It may come as a surprise, though, to learn that some of your most valuable assets might not follow your will at all. If you have retirement accounts, life insurance policies or bank accounts with named beneficiaries, those designations usually determine who receives those assets. Understanding how these rules work may help you avoid unexpected results for your loved ones.
Why do beneficiary designations take priority over your will?
Some financial accounts transfer directly to the person you name as the beneficiary. As a result, these assets often pass outside the probate process instead of following the instructions in your will.
Under New York law, certain beneficiary designations transfer assets directly to the named recipient when the account owner dies. Because of that, your will generally cannot change those designations.
Common examples include:
- Retirement accounts, such as individual retirement accounts (IRAs) and 401(k) plans
- Life insurance policies with named beneficiaries
- Payable on death (POD) and transfer on death (TOD) bank or investment accounts
Keeping these designations up to date may play an important role in helping your estate plan reflect your current wishes.
How common mistakes create unintended inheritances?
Life often changes faster than estate planning documents. If you do not update your beneficiary forms after major life events, your assets could go to someone you no longer intended to receive them.
Situations that may create problems include:
- Leaving a former spouse listed as a beneficiary on a 401(k) plan
- Failing to name a contingent beneficiary if your original beneficiary dies before you
- Assuming your will automatically replaces earlier beneficiary designations
For example, New York law revokes beneficiary designations to a former spouse after divorce for many assets. However, federally regulated retirement accounts, such as 401(k) plans, generally follow federal law instead. As a result, those accounts may still pass to a former spouse unless you update the beneficiary form.
These situations could create confusion and, in some cases, contribute to family disputes that you hoped to avoid.
Keeping your estate plan working together
Your will remains an important part of your estate plan, but it works best when it aligns with your beneficiary designations. Reviewing your documents after marriage, divorce, the birth of a child or another significant life event may help keep your estate plan consistent. In addition, speaking with a qualified estate planning attorney may help you understand how these rules could apply to your situation and reduce the risk of unintended outcomes.