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By David Inabinett, Attorney at Law

When you open a bank account, retirement account, or purchase life insurance, you are always asked to name one or more beneficiaries when you complete the paperwork. When you write a Last Will and Testament, you also name individuals as beneficiaries of your estate. So how are these different?

An easy way to understand the difference between a designated beneficiary and a person named in a will is to look at who makes the distribution of that asset or property. When you name a beneficiary on specific financial accounts, insurance policies, retirement plans or the like, the financial institution will distribute the funds to the individuals you have designated as beneficiaries. This distribution happens upon formal notification (usually a certified copy of the death certificate and completion of that institution’s claim forms) that the account owner has died and proof of the beneficiary’s identity. (Do note that in the case of most joint accounts, the death of one party will not trigger the distribution of funds. Joint accounts are usually set up with rights of survivorship, meaning the other party retains the funds.)

This distribution by the manager or administrator of the account occurs outside of the will and usually takes precedence over the will as it is specifically designated in the account’s contractual documentation.  The specific designation of a beneficiary has been made by the account owner. It is usually straightforward and leaves little to no room for misinterpretation as long as the beneficiary paperwork has been properly completed, submitted and accepted by that institution prior to the account owner’s death.  A trust can be designated as beneficiary, but this generally requires more information to be provided to the financial institution or insurance company.

Additionally, it is generally easy to change the beneficiary on an account by contacting the financial institution or insurance company. In the case of married couples, North Carolina law does favor spouses, so you may be unable to change your beneficiary to someone other than your spouse without their written consent on certain retirement fund accounts. This can become an issue if you are separated but not yet divorced.  Also of note, a divorce does not automatically revoke previously signed beneficiary forms so be sure to update those at your financial institutions or insurance companies upon a later divorce.

On the other hand, in a will, you name an executor, the equivalent of an account administrator or manager at a financial institution. Wills are a bit more complex to draft and are more comprehensive as they typically consider other aspects of estate distribution, including guardianship, future care for disabled individuals or minors, and real property. After all debts are settled, the executor will distribute your other assets and property as detailed in the will. The deceased may have named specific individuals or charities to receive certain assets after payment of debts. The executor is obligated to distribute the assets named in the will accordingly.

In either case, individuals may contest the beneficiary designation (financial accounts or life insurance) or the will, though the process can be complex and expensive. In general, overturning a beneficiary designation requires you to prove the account holder was subjected to undue influence, fraud, or duress and the insurance company or financial institution would have to be named as a party to the lawsuit as well, which creates additional obstacles to someone lodging a challenge to such a designation.

If you have specific questions about designated beneficiaries or need to create (or update) your estate plans, please contact us to schedule an appointment.