Question:
If I fill out a beneficiary form for my stock, IRA, or bank account (to avoid probate), should I name the beneficiaries in my will, too? Or will that only muddy the waters? Also, does naming beneficiaries for these accounts help with the overall estate taxes if they are not listed in the will?
Answer:
Your instincts are right—naming beneficiaries in two different ways will only confuse matters after your death. It's better to designate beneficiaries on the forms provided by the institutional custodians of these accounts (such as the bank) and leave them unmentioned in your will. (For other arrangements better made outside a will, see What a Will Won't Do.)
As you may already know, you can designate beneficiaries for pretty much all bank accounts (known as POD or payable-on-death beneficiary designations), as well as brokerage or securities accounts (known as TOD or transfer-on-death beneficiary designations). You can ask the financial institution or brokerage firm for the exact forms you'll need to name beneficiaries on your accounts.
If you do die leaving behind conflicting wishes, your beneficiary designation on your bank account will override any conflicting designation in your will.
Example: Amy fills out her bank's paperwork and names her brother Sam as the beneficiary of her bank account. Many years later, she creates a will that leaves the same bank account to her sister Isadora. When Amy dies, the money in the bank account will go to Sam. The bank account will be transferred to Sam outside of the probate court process.
The best approach is to name beneficiaries as well as contingent (alternate) beneficiaries for your bank accounts, and not to mention them in your will. This will avoid the expense and delay of probate.
However, to get to the second part of your question, naming a beneficiary on your bank account will avoid probate, but it have no effect whatsoever on the amount of estate tax, if any, owed. The IRS doesn't care how you leave property—it's only interested in how much you leave. Most Americans won't owe estate taxes, though, so you probably won't need to be concerned.
Get more information on estate taxes.
