If you’re reading this article, odds are you have at least one of the following:
- Retirement plan accounts, such as a 401(k) or IRA
- Pension plans
- Life insurance policy
- Investment accounts
- Banking accounts
If you don’t, then stop reading this article. Go back to counting gold bullion, beans and bullets in your doomsday shelter.
But if you do have any of these assets, then it’s important to recognize the importance of establishing beneficiary designations. Not only that, but it’s crucial to maintain your beneficiary information as life changes occur.
What is a beneficiary designation?
Simply put, a valid beneficiary designation tells a financial institution (such as a bank, brokerage firm, or insurance company) what to do with your financial assets if you pass away.
While this sounds like what a will does, it’s different in two major aspects:
- Generally, a beneficiary designation supersedes whatever is stated in a last will.
- Assets that are transferred by beneficiary designation generally avoid the probate process.
Because of those two things, beneficiary designations can be a very easy way to ensure your money goes to the right party in the event of your death. Generally speaking, it’s always good practice to keep as many assets as possible out of your probate estate.
With that said, there are many things you need to keep in mind when you designate beneficiaries. Here are 5 considerations to keep in mind.
1. You should have a named beneficiary for every account.
This sounds like a no-brainer, but it’s not always the case. If you’re setting up life insurance benefits for your minor children, it’s natural to think of them as your beneficiaries. Since you’re setting up the policy for them to inherit your death benefit, you’ll fill out the beneficiary form.
What about when you open a bank account, or rollover your retirement assets into an IRA? Then, designating your beneficiaries probably isn’t top of mind.
If there isn’t someone prompting you to do this, you’ll probably fill out whatever paperwork they give you. But if they don’t include a beneficiary form, you probably won’t remember to ask for one.
To address this issue, it’s a good idea to create a list of every type of financial account or insurance product you have. This would include:
- Workplace retirement accounts, like 401(k) or 403(b). If you have accounts or retirement benefits from previous employers, revisit those too.
- All banking accounts (checking, savings, and money market)
- Life insurance policies
- Investment accounts
If you have a revocable trust with accounts established in the name of the trust, include those accounts as well.
Once you have that list, go through and double-check to ensure that you have someone designated. Even if you’ve filled all the blanks in your beneficiary designation forms, you might not have the right specific individuals.
2. Take the time to learn some of the language
For example, what is per stirpes vs. per capita? Do you know the different types of beneficiary designations for your accounts. Are you aware of the difference between a primary and a contingent beneficiary?
You might have an idea about what you want your estate plan to look like. And your estate attorney might help you understand some basic concepts.
But you’ll get the most benefit if you ask questions and try to learn along the way.
3. You should update your beneficiary designations as life events occur.
Have you experienced a major life change? Did you get a divorce? Get married? Experience the birth of a child? Have kids that grew up and left the house?
Even if you designated a specific person as your beneficiary on an account, that person might not remain your beneficiary forever. Sometimes, you need to update beneficiaries so you can revoke prior designations (like to a former spouse).
In the military, there are tons of tales about the Sailor who:
- Fell in love with someone
- Got married
- Had kids (not necessarily in this order)
- Died without changing beneficiaries on their life insurance. At the time of death, Mom was still the primary beneficiary.
- Left their surviving spouse destitute because their mom kept the insurance money
It’s a sad story. Every time. And there is nothing that anybody can do about it after the fact.
But this particular situation doesn’t have to happen. So while you’re ensuring that you have designated beneficiaries for each specific account, take the extra step to ensure that everything is going to the right person.
4. Designate secondary beneficiaries
What happens if you and your spouse get into a car accident? What if they die before you, and before you get a chance to update your documents. If you don’t have a living person as your primary beneficiary, then the financial institution relies upon contingent beneficiary designations.
Contingent beneficiaries (sometimes known as secondary beneficiaries) receive the particular asset if there are no surviving primary beneficiaries. If you don’t have these on file, then your estate is likely to receive the assets. And your heirs will likely go through your state’s probate process to get the money they should have received.
You can avoid this by having a secondary beneficiary designation on file for each account. This will allow the financial institution to proceed if the primary beneficiary isn’t able to receive the money.
5. Keep in mind special circumstances
Do you have children? Do you have a special needs family member? How about an adult child that will blow all the money as soon as they get it?
If you have special circumstances in your life, you might need to discuss them with your estate attorney or financial advisor. If you don’t have one, then you should hire one. The good estate attorneys and advisors are worth the cost.
For example, if you have children, designating them directly as a beneficiary of a retirement account might be problematic if they are still minors. In this case, you would probably want to ensure that your estate documents AND your beneficiary designations reflect what you really wish to happen.
So, you would discuss this with your estate attorney, create the necessary documents (like a trust), then designate your beneficiary accordingly.
6. Review your beneficiary designations routinely with your estate attorney or financial advisor(s)
Odds are, if you have an estate attorney AND a financial advisor, you probably see your financial advisor more often.
After all, your estate attorney only needs to:
- Create your estate planning documents
- Update your documents as life changes occur
- Be available when you need to ‘break glass.’
And your estate attorney probably will charge you by the hour.
However, if your financial advisor is a good one, you’re probably seeing them on a regular basis. You should be seeing your advisor at least once or twice per year.
And if that’s the case, you’ve got no excuse not to review your beneficiary designations on a regular basis. In fact, most financial advisors have beneficiary designations on their estate planning checklist. And if they’re managing your accounts, they can make those beneficiary changes for you.
7. Think about the taxes
Taxes don’t have to drive every financial decision that you make. But understanding the tax consequences of your decisions should be important to you.
As well as keeping up with the tax law changes as they happen.
For example, as a result of the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), required minimum distributions went away. But they were replaced by new rules that established the ‘eligible designated beneficiary.’
That might be important for an inherited retirement account, like an inherited IRA. So you need to know what an eligible designated beneficiary is.
If these terms look confusing to you, then talk with your financial advisor. Have your advisor break down this information so you understand it clearly. Having that clear understanding will help you make tax efficient decisions.
While your estate planning documents are important, they’re not everything. Keep in mind that your beneficiary designations can keep your estate plan intact, or completely undo everything you intended.
The next time you meet your financial advisor about estate planning, make sure you go over your beneficiary designations.
After retiring from a 24-year career as a Naval officer in 2017, Forrest became a financial planner to help people achieve success in managing their personal finances. In 2022, he sold his partnership stake in his financial planning firm to focus on helping people full-time through his writing.
Featured in: Forrest’s writing has been featured in the following publications: Forbes, Military.com, NerdWallet, Yahoo Finance, The Military Guide, The Military Wallet, Christian Science Monitor, and many other publications.
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