The Importance of Beneficiary Designations in a Texas Estate Plan

When most people think about estate planning, they immediately think of a Last Will and Testament, but Beneficiary Designations are just as important.  Beneficiary designations on your financial accounts allow funds to be distributed directly to your beneficiary on your death without going through the probate process.  In other words, your Will does not control the funds on deposit in bank accounts with valid beneficiary designations.  Instead, those funds pass to your designated beneficiaries pursuant to the contractual agreement you have with your financial institution.  

What Are Beneficiary Designations?

A beneficiary designation is a legal instruction you give to a financial institution, insurance company, or account custodian that determines who will receive the asset upon your death. These designations override your will. That means if you name someone as the beneficiary of a retirement account, the funds go directly to that person—regardless of what your will says.

This is because beneficiary designations create non-probate assets. Instead of going through the court-supervised probate process, the asset passes directly to the named beneficiary by contract.

Common Accounts and Financial Instruments with Beneficiary Designations

Many types of assets allow (or even require) you to name beneficiaries, including:

• Retirement Accounts – IRAs, 401(k)s, 403(b)s, and pensions.
• Life Insurance Policies – Proceeds are distributed to the named beneficiaries.
• Bank Accounts – Payable-on-death (POD) designations.
• Brokerage Accounts – Transfer-on-death (TOD) designations.
• Annuities – Beneficiaries can be named to receive remaining benefits.
• Health Savings Accounts (HSAs) – May pass directly to the named individual.

A beneficiary can be an individual person or a trust. Trusts should be used when the beneficiary is a minor child, has special needs, or when more control over the timing and manner of distributions is desired.

Types of Account Ownership and How They Affect Transfer

It’s important to distinguish between beneficiary designations and account ownership structures:

• Co-Owners (Joint Accounts) – Both owners have equal rights during life. Upon death, survivorship rights (if elected) determine who owns the account.
• Joint Tenancy with Right of Survivorship (JTWROS) – At death, the surviving joint tenant automatically becomes the sole owner.
• Authorized Signer – An authorized signer can transact during life but has no ownership rights. At death, the account is still subject to probate unless a beneficiary is named.
• Community Property with Right of Survivorship (in Texas) – A special designation for married couples that allows the surviving spouse to inherit outside of probate.

Divorce and Beneficiary Designations

Divorce legally writes a spouse out of a Will, but it does not remove the ex-spouse from beneficiary designations. If you named your spouse as the beneficiary of your life insurance policy or retirement account and forgot to update it after divorce, your ex-spouse could still legally receive those funds.

This makes regular review of beneficiary designations critically important, especially after major life changes like marriage, divorce, or the birth of children.

Beneficiary Designations and Minor Children

While it may seem simple to name a child directly as the beneficiary of a financial account, doing so can create significant complications if that child is under 18 at the time of your death. Texas law does not allow minors to directly own significant financial assets. Instead, one of the following will need to happen:

1. A guardian of the child’s estate must be appointed by the court, which is expensive and requires ongoing court oversight.
2. The funds may need to be deposited into the registry of the court, where they remain inaccessible until the child turns 18.
3. The court may establish a Texas Property Code §1301 Management Trust.

What Is a §1301 Management Trust?

A Section 1301 Management Trust (sometimes called a “1301 Trust”) is a trust created under the Texas Property Code to hold and manage funds for a minor (or for an incapacitated adult). The trust is managed by a corporate fiduciary, such as a bank trust department, and the court retains ongoing jurisdiction over it.

While this arrangement provides structure, it is costly, involves court oversight, and may limit flexibility. Most families would prefer to avoid this outcome.

The better solution is often to name a trust—created within your will or living trust—as the beneficiary of your accounts. That trust can be structured to hold funds for your children until they reach a more appropriate age, with terms you decide and a trustee you trust.

Why Reviewing Beneficiary Designations Is Essential

Beneficiary designations are powerful estate planning tools, but only when used properly. They:

• Allow assets to pass outside of probate.
• Provide immediate access to funds for beneficiaries.
• Can be customized to align with your overall estate plan.

However, failing to coordinate beneficiary designations with your will or trust can lead to unintended results, such as assets going to an ex-spouse, minor children being forced into costly court-managed trusts, or distributions that conflict with your estate plan.

Final Thoughts

A well-crafted estate plan in Texas goes beyond drafting a will. It requires a thoughtful review of all your accounts and beneficiary designations to ensure everything works together. By properly naming beneficiaries—and knowing when a trust is the better option—you can save your loved ones time, money, and stress.

At the Law Office of Laura Vale, PLLC, we help Texas families create comprehensive estate plans that protect their loved ones and avoid unnecessary legal complications. If you would like to review your beneficiary designations or update your estate plan, call us today at 210-588-9881 to schedule a consultation.