Why Designated Beneficiaries Are Key to Your Estate Planning

Before Zygmund Furmaniuk’s aunt Mary died in 2023, she set up a trust to hold her assets and to distribute her estate, which was valued at nearly $1 million.

A retired chemistry teacher, Mary Furmaniuk was single and had no children. Creating the trust, Mr. Furmaniuk said, was her way of making sure her assets ended up where she wanted them — with him and three other nieces and nephews. But even though his aunt had a will, the arrangement caused considerable frustration for Mr. Furmaniuk, of Belmont, Mass., and one of his cousins, who were co-executors.

The hard part wasn’t figuring out the sale of her house and what to do with her valuables. The more complicated part was distributing the money in her individual retirement accounts, which had been placed within the trust — but without designated beneficiaries.

“If she had made us each 25 percent beneficiaries directly on her I.R.A.s at Fidelity, not from within the trust,” Mr. Furmaniuk said, “the monthlong duration of paperwork I had to go through, which ended up the size of a small phone book, would have been unnecessary.”

Major brokerage firms like Vanguard and Fidelity ask savers to name designated beneficiaries — the people they want to inherit the money when they die — when they open individual retirement accounts or 401(k)s. But even having them in place doesn’t cover the assets that wills do. Here is why you should have both.

Wills vs. designated beneficiaries

Wills are legal documents that lay the groundwork for dividing valuable possessions, like real estate, in addition to investments and cash when a person dies. If you die without one, the state where you were a legal resident will take over distributing those assets. And that can become a complicated web.

Every state has its own laws governing who inherits your property if you die without a will. Often, it’s the person’s closest living relatives, such as a spouse, parents or siblings. But defaulting to state laws involves rulings from probate courts, which handle legal decisions when someone dies. Getting those rulings often requires heirs to invest their time and money, and can significantly delay the settlement of an estate.

“When it comes to dying without a will, there’s this idea, and it’s not crazy, that the defaults that states adopt are broadly in line with what people would want to do anyway,” said Gal Wettstein, a senior research economist at Boston College.

A state may distribute houses, accounts and cars to a spouse first, for example. If the spouse has died, those assets may be split among children. But with property like real estate, for example, the division can get complicated. A deed to a house or land has to be clear before the heirs can sell it, Dr. Wettstein said. If there is a disaster, such as a fire or flood, before the property is sold, heirs may also have trouble filing an insurance claim to make repairs.

An important consideration, Dr. Wettstein said, is that state defaults don’t take into account how American families and households have evolved. Defaults “are not well suited to nontraditional family structures,” he said. For example, if a parent hasn’t formally adopted a stepchild, the child may not receive anything when the parent dies.

While wills must be administered by a court, designated beneficiaries may need only to show their identification and the account owner’s death certificate to an institution like Vanguard to receive a payout — but each institution will have its own procedures, so become familiar with them. The key is that naming beneficiaries will help your heirs bypass probate court and its costs.

Keep in mind, though: “One of the misconceptions that sometimes comes up is: ‘If I have designated beneficiaries listed, I don’t need a will,’” said Sabino Vargas, a certified financial planner and senior financial adviser at Vanguard. “That’s a great opportunity to provide some education, because a will does so much more than people think.”

For example, those who have minor children or pets can name guardians for them in their wills. “You can also imagine there are situations involving art, jewelry, collectibles,” Mr. Vargas said. “Unless you want to turn over what happens to your assets and the guardianship of your children to the state, we think a will is a critical piece of an overall estate plan.”

How to draw up a simple will

“Ideally, everyone should write up a will, including young people, each individual spouse and people living with partners, even if you think you don’t have much to pass on,” said Marcia Mantell, a retirement consultant in Plymouth, Mass. “Even a computer, cellphone and other tech should be passed to someone you personally name. This helps settle your estate outside of the probate courts.”

Two of the most common ways of drawing up a will are hiring an estate lawyer and using an online template, Ms. Mantell said. For those going the D.I.Y. route, it’s important to note a few technical details. First, because wills are subject to state laws, make sure to include elements your state requires. Sometimes that means recruiting a witness or two to sign the will.

Also, “most states require that you include certain language making clear that you are not being forced into the terms of the will” — for example, that you are of sound mind, Ms. Mantell said.

Getting started is easy, she said — and not necessarily cost prohibitive. “If you can’t afford to see a lawyer, download a PDF and fill it in and sign according to your state’s laws,” she wrote in an email. “Google something like, ‘making a will in [name of your state],’ and options will pop up.”

Transferring wealth where you want it to go

For an introduction to a study by the Center for Retirement Research at Boston College, Dr. Wettstein and his co-authors outlined the ways in which wills can be transformative, especially for Black and Hispanic families.

“Despite the advantages of having a will, only about two-thirds of households with heads ages 70 and older had a will in 2020, and the share of white households with a will was more than twice that for Black and Hispanic households,” they wrote. People who receive an inheritance, they added, are more likely to leave a bequest for the next generation, and people of color are less likely to report receiving an inheritance.

But transferring wealth often lays the foundation for the kind of future families strive for. The transfer of wealth via inheritance can propel a family into homeownership or a better school district, for example. Reaching those goals solely through earned income may be more of a challenge, the study’s authors noted.

“Wealth can provide a buffer,” Dr. Wettstein said. How it reaches heirs — whether through a trust, a will or a beneficiary designation — doesn’t matter, as long as it reaches them.

Still, from Mr. Furmaniuk’s perspective, it’s worth understanding every line of fine print on estate documents, whether they are issued by a bank, an insurance company or a lawyer.

When the dust settled on his aunt’s estate, “she got the outcome she desired, and things worked out fairly for all concerned,” he said. But if everyone involved had had a better understanding of the intersection of designated beneficiaries and trusts, “it could have been a whole lot easier.”