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Beneficiary designations on life insurance, retirement accounts, bank accounts with payable-on-death (POD) clauses, and investment accounts with transfer-on-death (TOD) instructions are undeniably useful. They can move assets outside probate and deliver funds quickly to the people named on the form. However, using designations as the primary—or only—estate planning strategy can create results that are inconsistent, tax-inefficient, and difficult to correct after death.
In Michigan, a coordinated plan that integrates beneficiary designations with a revocable trust, a will, and properly drafted incapacity documents is the safest way to ensure assets pass as intended, with appropriate protections and tax treatment.
Designations Override Wills and Trusts
A frequent and costly mistake is assuming that a will or revocable trust will “fix” an outdated beneficiary form. In most cases, the beneficiary designation controls, even if it contradicts the will or trust. This becomes particularly problematic after divorces, remarriages, births, deaths, or employer plan changes, when an old designation quietly remains in place. The result can be unintended disinheritance, family disputes, and pressure on the personal representative or trustee who expected different asset flows.
The practical safeguard is a deliberate review cycle—at least annually and after major life events—so that each account’s designation matches the overall dispositive plan, with both primary and contingent beneficiaries listed and, where appropriate, per stirpes directions.
Minors, Special Needs, and Loss of Control
Naming a minor child directly as a beneficiary seems simple until administration begins. In Michigan, a minor’s receipt of funds often necessitates a conservatorship through probate court, adding delay, oversight, and cost. Worse, at age 18 the child may receive a substantial sum outright, regardless of maturity.
The same complications arise if a beneficiary designation leaves a share to a child “per stirpes” or otherwise in a manner that passes the predeceased child’s share to that child’s own minor descendants. If the contingent recipients are minors, Michigan law will generally require a conservatorship to receive and manage those funds, introducing probate court involvement, delay, expense, and court oversight—and may still result in an outright distribution to the minors at age 18.
Similarly, an outright distribution to a beneficiary with disabilities can jeopardize means-tested benefits such as SSI or Medicaid. Designations also provide no guardrails for creditor protection, divorce exposure, or prudent management; once paid, funds are fully subject to the beneficiary’s circumstances and decisions.
A more controlled approach uses a revocable living trust, testamentary trust, or a properly drafted supplemental needs trust as the named beneficiary. This preserves eligibility for public benefits when needed, introduces spendthrift protections, and allows age-based or purpose-driven distributions that track the client’s values.
Gaps, Lapses, and Unintended Probate
Another trap is failing to name contingent beneficiaries. If the primary beneficiary predeceases the account owner and no contingent is named, the account may revert to plan defaults or the decedent’s estate, triggering probate and disrupting the intended plan. That can delay access to funds, force distributions contrary to expectations, and, for retirement assets, accelerate taxable income.
Simple housekeeping—adding contingent beneficiaries and confirming how per stirpes applies with each custodian—avoids these outcomes and helps ensure the plan works even when life changes intervene.
Tax Inefficiencies with Retirement Accounts
Post-death income tax rules for retirement accounts have tightened under the SECURE Act and SECURE 2.0. Many non-spouse beneficiaries must withdraw inherited IRA or 401(k) balances within ten years, which can push them into higher tax brackets and compress tax deferral. Naming the “estate” or a nonqualified entity as beneficiary can further reduce flexibility.
Trusts can be effective beneficiaries, but only if drafted to satisfy “see-through” requirements and coordinated to function as conduit or accumulation trusts based on the family’s needs. Careless drafting or poorly aligned designations may eliminate tax-efficient distribution options. Aligning retirement account designations with trust provisions, considering spousal rollover opportunities, and documenting qualified disclaimer strategies can substantially improve outcomes.
Fragmentation, Liquidity Shortfalls, and Unequal Results
Because beneficiary designations transfer assets outside of probate, they can starve the estate or trust of needed liquidity for taxes, debts, administration costs, and specific cash bequests. The recipients named on POD or TOD accounts receive their shares regardless of these obligations, which may force the personal representative to sell illiquid assets or pursue contribution from beneficiaries—both of which fuel conflict. Fragmentation also occurs when multiple accounts with differing designations unintentionally skew overall shares among heirs.
A better practice is to prepare an asset-flow map, ensure the revocable trust is properly funded, and calibrate which assets pass by designation versus through the trust so that the intended percentages are achieved after expenses and taxes.
Spousal Rights, Divorce Effects, and Plan Rules
Michigan law provides a surviving spouse with statutory rights, including an elective share and certain allowances. Passing assets by beneficiary designation does not necessarily defeat those rights, and disputes can arise if the overall plan disregards them.
Divorce adds another layer: while Michigan law may revoke some dispositions to a former spouse, federal preemption for ERISA plans and specific carrier rules can lead to outcomes that differ from state-law expectations if forms are not updated. Immediate updates to all designations upon marriage, separation, or divorce—and careful coordination for employer retirement plans—are critical to avoid litigation or unintended payments.
Bringing It All Together
Beneficiary designations can be a valuable part of an estate plan, but they may create unintended mismatches with wills or trusts, expose vulnerable beneficiaries, reduce tax efficiency for retirement assets, or limit liquidity for expenses. Many of these issues can often be mitigated by coordinating designations with a revocable living trust and building in appropriate contingencies, while recognizing that estate planning is not one-size-fits-all and should be tailored to each person’s goals, assets, and family circumstances.
