Outdated Beneficiaries Can Undo Your Entire Estate Plan: Regular Review Is Critical

Key Takeaways  

• Forgetting to update beneficiaries after major life events can exclude family members from inheritances. 

• Naming minors as direct beneficiaries bypasses trust protections. Specify trust arrangements on beneficiary forms. 

• Without careful estate planning coordination, blended families can unintentionally disinherit children from prior marriages. 

  
  

Most people don’t enjoy planning for their own demise. But it’s important to review your will, estate plan and beneficiary designations periodically, because if they’re not correct or up to date, they can override the instruction in your will. If you’re a Novi client, we will review your beneficiaries every year. We also review your will, powers of attorney, and other estate documents every three to five years unless something significant occurs along the way such as a death in the family, divorce, new child added to the family, or some other event that would require a review. Here are four of the biggest oversights we see and how to correct them: 

1. Your Will Does Not Control Your Entire Estate 

One of the biggest misunderstandings many people have about estate planning is that not everything goes by the direction of your will. Your home and your brokerage account investments flow by what is in your will, but your retirement accounts, life insurance and annuities will pass directly to the named beneficiaries outside of the court-supervised probate process. It's very important to ensure that your will, trust documents, and all beneficiary forms are consistent with each other.  

2. Naming a Minor as a Direct Beneficiary 

Let’s say a couple in their 40s has three young children. Their will states that each child will inherit one third of their money if they both pass away unexpectedly. But because the kids are so young, the money would go into a trust until they reach certain ages. But when we looked at their $5 million life insurance policy (non-probate asset), they simply had the children named as contingent (secondary) beneficiaries named outright (not in trust). So, if both parents pass away at the same time, the kids will split the full $5 million death benefit immediately instead of going into a trust until they’re old enough to handle their windfall responsibly. The insurance policy doesn’t necessarily follow the instructions in the will. So, we would have to update the language on the life insurance policy to specify that the money would go into a trust for the kids rather than directly to the kids if both parents passed before the kids reached a certain age. That’s a very common mistake we see.   I would say 80% to 90% of clients have stipulations in their wills that stagger their heirs’ inheritance based on milestones, such as one-third distributed at say, age 25, one-third at age 30 and the remainder at age 35. Or they tie those distributions to getting married and then having their first child. But other clients tell us, even though my daughter is only 18, she's very smart and responsible. The inheritance can go entirely to her now; it doesn’t need to go into a trust. Whichever route you decide on is totally acceptable, we just need to make sure it aligns throughout your entire estate plan.

3. Unintentionally Disinheriting Children from a Prior Marriage 

When couples get remarried later in life, it’s common for one spouse to have significantly more assets than the other. Once the two families are blended, the children of the wealthier spouse can feel like they’ve lost a lot of their inheritance if the parents’ estate is now shared equally with their half-siblings.  

A couple we work with is each on their second marriage. The mother has three college-age daughters with whom she has a strained relationship. The husband has a pre-teen daughter from his previous marriage. The couple just updated their estate plan, and I told them they need to be very careful because they own joint assets together and they want to make sure things flow the way they intended for all of the children when they each pass away. I told them they may want certain accounts (or amounts) to go to the wife’s three daughters, even though she doesn’t have a good relationship with them, and have other accounts go to the husband’s daughter, with whom they have a great relationship. It can be very intricate, and that's why we have them working with an estate attorney. It’s a bit more complex than just putting together a will on their own. 

It’s worth mentioning here that Novi advisors are skilled at getting delicate estate planning conversations started, but we use outside estate attorneys to draft wills, trusts and other estate planning documents after having more detailed conversations with our clients. From there, the attorneys pass the will or other estate documents to us, and we make sure all the client’s instructions and wishes are followed and that all the beneficiaries are current and accurate.  

4. Naming Contingent Beneficiaries 

I’ve seen younger couples who are extremely busy with their careers and raising young children who forget to update their plans after a child is born. I was reviewing a plan for a couple with four young kids who forgot to update their plan when the fourth child was born. If they died suddenly, and we hadn’t caught the mistake, then the fourth child would have been left out of the will and wouldn’t have received any inheritance or their share of the life insurance policy.  

If you don’t name primary and secondary beneficiaries, it can get a little messy. Your estate essentially becomes the beneficiary. That’s far less efficient since it goes to probate and can be contested. That's another advantage of having your assets in IRAs and life insurance, because they’re not subject to the probate process and can pass to your beneficiaries in weeks rather than years.  Outdated beneficiaries and estate plans

Conclusion  

Big picture: Having all your beneficiaries and designations in order is a wonderful gift to give to loved ones who need them to navigate your estate while grieving. Don’t hesitate to reach out if you or someone close to you has concerns about your will, estate plan or beneficiary designations. I’m happy to assist.

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 BRENDEN LEESE, CFP® is a Wealth Advisor at Novi Wealth Partners