Maryland Estate Planning: Beneficiary Designations

A beneficiary designation is generally the agreement that someone makes with a financial institution to pass their assets on after their death to the named beneficiary or beneficiaries. Assets that pass by beneficiary designation typically do not pass pursuant to the terms of an individual’s last will or trust, if they are not coordinated to do so. Therefore, it is very important for someone planning their estate to review their beneficiary designations during the planning process to ensure against unintended beneficiaries and to provide for liquidity in their estate to pay for taxes or administrative expenses.

After planning documents are executed, a Maryland estate planning lawyer will start working with their client to discuss beneficiary designations. If you are interested in creating an estate, speak with an experienced attorney to discuss what steps you need to take.

What is a Beneficiary Designation?

A beneficiary designation in Maryland estate planning is a contract between an individual and the financial company. They are most often seen on retirement assets or life insurance, so, for example, it is not uncommon to say the beneficiary of the individual’s life insurance policy is the individual or their child or their grandchildren. That contract would be perceived whether that has been written in a last will and testament. 

A last will and testament only governs assets that are in a decedent’s sole name and have not been pre-funded into a trust, do not have a joint owner or a beneficiary designation. That aspect is a very commonly misunderstood element of estate planning. Some individuals will draft and then go to the process of creating a thorough estate plan, but as they get older or as they move into having estates, the brokerage houses or financial institutions will encourage them to leave a beneficiary on their accounts as themselves. 

Superseding Own Estate Planning

The individual might not realize that they are actually superseding their own estate planning. For example, if an individual has three children, they might have one child that is particularly close to them who is frequently the sole assignee and a bank or brokerage house will encourage the individual to name the one child as a beneficiary. The individual might not realize that the money becomes the child’s and the child doesn’t have an obligation to split it with the other children, even if that is what written in the last will and testament. 

Real Estate Role

Because many assets are left with beneficiary designations, often the estate will may be illiquid. It is not uncommon for beneficiary designations to be on life insurance or financial brokerage accounts, but they are not often on real estate.  Therefore, the real estate would be the only asset passing by the terms of the will.  Without any assets to maintain the real estate or pay expenses, the real estate may need to be sold to pay the expenses of administering the estate.   

In the estate planning process in Maryland, an attorney works with individuals to coordinate their beneficiary designations just to comply with their overall plan and they remind them that as they change bank accounts, that they change beneficiary designations that will have an impact on the ultimate distribution of their estate. 

Impact of Beneficiary Designations on Estate Planning in Maryland

Coordinating your beneficiary designations will typically help to dictate which assets are actually covered by the plan that an individual puts into place. It is important to coordinate the designation so that an individual can be sure their will or trust provisions are properly funded, and there is not liquidity in their estate to pay for taxes, funeral, and administrative expenses. For example, if someone sets up a trust for the benefit of their children, but all of their assets are payable on death to a friend, they may end up with no assets in the trust for their children because those assets are not governed by the terms of the trust. It is important to be very careful and detailed about beneficiary designations, which is why one should speak with an estate planning attorney in Maryland if they have any questions about the process.

What Happens to Someone’s Retirement Accounts After Death

Generally, retirement accounts in Maryland will be handled pursuant to the terms of the beneficiary designation. In absence of a designation, the financial institution rules for distribution may come into effect or the asset may be distributed according to the nature of the retirement asset. One possibility is that it may be distributed to the decedent’s estate. That is frequently an unfavorable outcome. If tax-deferred retirement accounts are distributed to an estate or a trust that is not designed to accept those types of assets, there is a possibility that income taxes will be accelerated. Rather, if the beneficiary designation names a person, taxes may continue to be deferred for that measuring life. Consult a Maryland estate planning lawyer to discuss how you can avoid unwanted taxes on your estate.

How a Maryland Estate Planning Lawyer Can Help

Beneficiary designations can be changed as long as an individual still has the capacity to make those types of decisions. An attorney can review their client’s designations and help their client make suggestions to coordinate the designations so that they comport with the overall estate plan. A knowledgeable estate planning attorney in Maryland will be able to address questions or concerns about the process.