10 Beneficiary Designation Tips
Beneficiary designations can provide a relatively easy way to transfer an account or insurance benefit upon your death.
We often complete these designations without giving it much thought, but they’re actually important and deserve careful attention. However, if you’re not careful, missing or outdated beneficiary designations can easily cause your estate plan to go awry.
Before listing the 10 tips, First a Primer on Will and Trusts.
It is important to remember and keep in mind that:
1) your Last Will & Testament only deals with a person’s estate (or what an individual owns in their individual name at death) and Wills needs to go through a process call Probate.
2) A Trust only controls the assets that are formally transferred into it.
With that in mind, a Trust will only control proceeds of an insurance proceed or other account if the Trust is explicitly listed as a beneficiary.
A Will only controls an account if the estate is listed as a beneficiary OR if you do not fill out a beneficiary designation form and the custodian account defaults the estate as the beneficiary of the account upon your death.
Here’s a sampling of where you’ll find beneficiary designations:
- Employer–sponsored retirement plans (401(k), 403(b), etc.)
- Life insurance policies
- Pay-on-death (POD) bank accounts
10 tips about beneficiary designations
Because beneficiary designations are so important, keep these things in mind in your estate planning:
- Remember to name beneficiaries. As stated above, if you don’t name a beneficiary, one of the following could occur:
- The account or policy may go through your estate which may require probate. This process often results in unnecessary delays, additional costs, and unfavorable income tax treatment.
- The agreement that controls the account or policy may provide for “default” beneficiaries. This could be helpful, but it’s possible the default beneficiaries may not be whom you intended.
- Name both primary and contingent beneficiaries.It’s a good practice to name a “back up” or contingent beneficiary in case the primary beneficiary dies before you. Depending on your situation, you may have only a primary beneficiary. In that case, consider whether a charity (or charities) may make sense to name as the contingent beneficiary. The likely last thing you want to do is buy life insurance after your first born but forget to update the beneficiary after having more children.
- Update for life events.Review your beneficiary designations regularly and update them as needed based on major life events, such as births, deaths, marriages, and divorces.
- Read the instructions.Beneficiary designation forms are not all alike. Don’t just fill in names—be sure to read the form carefully.
- Coordinate with your will and trust.Whenever you change your will or trust, be sure to talk with your attorney about your beneficiary designations. Because these designations operate independently of your other estate planning documents, it’s important to understand how the different parts of your plan work as a whole.
- Think twice before naming individual beneficiaries for particular assets.For example, you establish three accounts of equal value and name a different child as beneficiary of each. Over the years, the accounts may grow unevenly, so the children end up getting different amounts—which is not what you originally intended.
- Avoid naming your estate as beneficiary.If you designate a beneficiary on your 401(k), for example, it won’t have to go through probate court to be distributed to the beneficiary. If you name your estate as beneficiary, the account will have to go through probate. For IRAs and employer-sponsored retirement plans, there may also be unfavorable income tax consequences.
- Understand the advantages and disadvantages of naming a trust as beneficiary.Consult your attorney or CPA before naming a trust as beneficiary for IRAs, employer-sponsored retirement plans, or annuities. There are situations where it makes sense to name a trust—for example if:
- Your beneficiaries are minor children
- You’re in a second marriage
- You want a trustee, not the beneficiary, to control access to funds
Even in cases like these, understand the tax implications before you name a trust as a beneficiary.
- Be aware of tax consequences.Many assets that transfer by beneficiary designation, such as IRAs, retirement plans, or annuities, have unique tax rules. It’s helpful to work with an experienced tax advisor who can help provide advice for your particular situation.
- Use disclaimers when necessary — but be careful.Sometimes a beneficiary may actually want to decline (disclaim) assets on which they’re designated as beneficiary. Keep in mind disclaimers involve complex legal and tax issues and require careful consultation with your attorney and CPA.
- When creating, updating, or simply reviewing your estate plan, pay attention to your beneficiary designations.
- Remember, beneficiary designations take precedence over what you may have specified in a will or trust.
- Put a reminder on your calendar to check your beneficiary designations annually so you can keep them up-to-date.