When was the last time that you checked your beneficiaries? Has it been more than 5 years? The beneficiaries on your accounts should be checked every 3 to 5 years. You may not need to make any changes but, it is good to verify that each of your accounts still have the beneficiary designations that you want. At minimum, every account should have a primary beneficiary listed. It is wise to designate a contingent beneficiary for each account as well. When the time comes, the primary beneficiary may be unwilling or unable to receive the inheritance.
What types of accounts do you need to have a beneficiary listed?
There are several types of accounts that should have a beneficiary:
- Roth IRA
- TOD (Transfer on Death)
- Life Insurance Policy
Who should you list as a beneficiary?
There are a few common choices that many people use for beneficiary such as a spouse, child, or other family member. There are also some alternative options like trusts, charities, or personal friends. The beneficiary designation is a highly personal decision and one that should not be taken lightly. You will have your reasons for designating a particular person or charity for your accounts. The important thing is that you check with an Attorney, Financial Planner, or Tax Preparer to ensure that the choice that you have made is both legal and in the best interest of the person or charity that you intend to benefit through your assets.
For instance, many people name a trust as the beneficiary of a retirement account such as an IRA or 401(k). While it might seem like a good idea to name a trust to protect the assets and avoid probate issues, in the case of a retirement account, it can be a costly mistake. The negative tax implications could do more harm than good.
There are also times when there might be legal limitations when it comes to selecting beneficiaries. The law favors spouses and children when it comes to inheritance of accounts. There are times when specific legal documents may need to be signed by both parties to verify that both agree to the beneficiary designation of someone other than a spouse. Divorce can also complicate the beneficiary process. It is important that you ensure that you are following all the stipulations of your divorce decree when selecting beneficiaries1.
It is always good to consult an Estate Attorney with any questions you might have regarding beneficiary designations. A good Attorney can help you to determine if there are any legal implications that could affect your decisions.
I have a Will, isn’t that Enough?
Having a will is important however, it is not enough. Even if you name someone as a beneficiary in your will or trust, you also need to name them as a beneficiary with the custodian of the account. A named beneficiary will supersede a will. Naming a beneficiary for each of your accounts is more important that naming them in your will. Failing to update your beneficiaries, both primary and contingent, with the administrator of your retirement account, annuity, or life insurance plan could mean the they will not inherit your account when the time comes. This is especially important when it comes to naming beneficiaries who are not spouses or children. Failing to designate beneficiaries who are not biologically related to you, could result in long and costly legal battles that might ultimately leave them with no inheritance in the end.
Even if your beneficiary is a spouse, child, or other biological relation, naming them as primary or contingent beneficiaries on your accounts is important. It can enable them to receive their inheritance faster and with fewer complications. It can also help them to reduce costs by avoiding the probate process.
Why might you change your beneficiaries?
It is common to designate a beneficiary when you first purchase a life insurance policy or open a retirement account. It is a wise practice to always wise to have at least a primary beneficiary designated for each account or policy. You never know when you will need it. Many of these accounts are opened and then held for many years before there is ever a need for a beneficiary. There are often many life changes that would necessitate the need to update the original beneficiary that was named. Any time you go through a major life change (marriage, divorce, birth, death, etc.) it is wise to review your beneficiary designations. It is quite possible that your designations have changed.
Who can help you to update beneficiaries?
You can always contact the insurance company or the custodian of a retirement account to update your beneficiaries but, that can be frustrating and time consuming. Working with a professional can often make the process easier and less confusing.
We frequently review beneficiary designations with our clients during their Review Appointments. We want to be sure that we are aware of any changes that need to be made. If there is a necessary update, we can usually locate the proper paperwork to make the change. We help our clients with the paperwork to ensure that it is properly filled out and sent to the appropriate place to make the update. Many clients have told us that they appreciate these checks and the assistance in making updates.
We also work with many Estate Attorneys to update beneficiaries for our clients. If a client has created or updated a will or trust, their Attorney will often contact us with a list of beneficiary designations that need to be updated. This allows us to be proactive in updating these accounts for our clients and again, eliminates much of the frustration of having to update the accounts themselves.
It is not fun, but it is important
No one enjoys thinking about death and the need to assign beneficiaries but, your beneficiaries will be glad that you took the time to properly update your accounts when the time comes. It is one of the final gifts that you can give to your loved ones, a simpler and less costly estate process.
If you need to update your beneficiaries and you are not sure where to start, give us a call. We can answer many of your questions and get you started on updating your beneficiaries. When you have completed the task, you will be happy that you did it and your beneficiaries will be too.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against a loss.