Beneficiary Designations and Estate Planning: What Families Need to Know

If you’ve ever opened a savings account, started an IRA, or purchased life insurance, you may recall the line on the form labeled “Beneficiary.” 

Whether you filled out this line or not – and whose name you listed – has an extraordinary effect on your estate once you pass. If your beneficiaries aren’t updated, this information can undermine your current estate plan. Though do note that avoiding probate is not the same as avoiding inclusion in the taxable gross estate. Here’s what families need to know about beneficiary designations and their role in estate planning. 

What is a Beneficiary Designation?

A beneficiary designation names the person, trusts, charities, and other entities to whom an asset will pass upon the owner’s death. When the asset’s owner dies, the asset passes directly to the beneficiary. It does not have to go through probate. 

Typically, when an asset’s owner dies, the beneficiary sends the death certificate to the institution managing the asset. For instance, if you list your eldest son as the beneficiary on your checking account, your son would contact the bank with a copy of your death certificate. The bank then transfers the account or its contents to the beneficiary, according to its policies and in compliance with state and federal law. 

If no beneficiary is listed, the asset often must pass through probate. 

Common Assets With Beneficiary Designations

Many different financial accounts and assets offer the option to name a beneficiary. Common assets listing beneficiaries include bank accounts, brokerage accounts, Individual Retirement Accounts (IRAs, including Roth IRAs), retirement accounts like 401(k), Solo 401(k), and 403(b) plans, some pension plans, life insurance policies, and some annuities. For some of these types of accounts, the spouse is the default beneficiary and notarized spousal consent is required to name anyone else. Pensions add more requirements. 

A similar process can also be used to pass real estate directly to a beneficiary upon an owner’s death. In 2024, Georgia introduced Transfer on Death (TOD) deeds – known in some states as “ladybird deeds.” The deed allows the owner to retain full control of the property during their life. Upon their death, ownership passes directly to a named beneficiary. 

TOD Versus POD: What’s the Difference? 

Two acronyms commonly appear when discussing beneficiary designations: TOD and POD. 

TOD stands for “Transfer on Death.” TOD typically applies when ownership of an asset transfers without the asset being liquidated. For instance, stocks are a common example of a TOD asset, because ownership of the stock transfers to the beneficiary. However, some brokerage TOD registrations result in liquidation. A Transfer on Death deed or “TOD deed” results in real estate ownership transferring to a beneficiary on the death of the owner. 

POD stands for “Payable on Death.” POD assets usually include items that pay cash to a beneficiary once the owner passes away. A checking/savings bank account is the classic POD example. 

Beneficiary Designations Versus Wills

A beneficiary designation can name nearly anyone to receive an asset once its owner passes. A will can also name nearly anyone to receive a person’s assets once they pass. These two documents don’t have to agree with one another – but when they don’t, issues can arise.

A beneficiary designation will override the contents of a will. Even if you intended to leave your IRA contents to all three of your children, for instance, those funds will go to only the child you listed on the beneficiary designation. This is why it’s essential to ensure that your beneficiaries align with your overall estate plan. 

Probate Avoidance Is Not Tax Avoidance

One common misunderstanding deserves special attention: passing an asset outside of probate does not remove it from your taxable estate. These are two separate systems. Probate is a state court process that governs how titled assets are administered and transferred after death; the federal estate tax applies to your “gross estate,” which includes essentially everything you owned or controlled at death, regardless of how it transfers. Your IRA, your 401(k), your POD bank account, your TOD brokerage account, real estate passing under a Georgia TOD deed, and life insurance you owned at your death are all included in your gross estate for federal estate tax purposes, even though none of them will ever see the inside of a probate court. Beneficiary designations are an efficient administrative tool, not a tax planning strategy. If your estate is large enough that transfer taxes are a real concern, reducing your gross estate requires deliberate planning—irrevocable trusts, lifetime gifting, and similar techniques—and that planning must be coordinated with your beneficiary designations rather than substituted for by them.

Aligning Your Beneficiary Designations With Your Overall Estate Plan

Often, a beneficiary is someone you list on an account or asset when you set it up. Over the years, you may neglect to change the name of the beneficiary. You may forget you named a beneficiary at all. 

The “set it and forget it” quality of beneficiary designations can also be a problem. A beneficiary designation can clash with your overall estate plan. For example, if you had only one child when you purchased life insurance, you may have named only that child as a beneficiary. Children born later won’t get access to your life insurance proceeds unless you update the beneficiary designation. 

Beneficiary designations are a powerful way to ensure that your assets transfer to your intended beneficiaries when you die. While you can’t be there to help your family through the end of your life, you can use these designations to handle financial and other matters for them, making the process easier. 

To ensure your beneficiary designations align with your overall estate plan, talk to an experienced Atlanta estate planning law firm today. The team at Slowik Estate Planning can help.