Designating a beneficiary can be tricky and emotional.
But failing to do so can derail your wishes and prevent your loved ones from inheriting your assets after your death.
Even if you have a will, designating a beneficiary for all your bank and retirement accounts, and insurance policies is crucial.
That’s because a beneficiary designation usually takes precedence over any named person in your will. Once a person is listed as the beneficiary, she will get those funds when you die—not the person named in your will.
Too often, though, people forget to make sure the heirs on their wills are the same as those listed as beneficiaries. They also fail to update those designations after significant life events such as: divorce, death of a spouse, and the birth of a child or grandchild. The results can be devastating.
An example: Dad names his daughter in his will as the sole heir but never removes his ex-wife’s name as the beneficiary on his life insurance policy. Upon his death, his daughter, who is depending on the inheritance to offset her healthcare costs, is left out as the death benefit goes to Dad’s ex.
Another time to reevaluate designations is whenever you make changes to your retirement account. This typically occurs due to a job change and resulting enrollment in a new employee pension plan. It also happens whenever your IRA or 401k is rolled over into another retirement account or converted into a different investment. With retirement accounts, the beneficiary assignments do not automatically carry over.
Designating beneficiaries bypasses the probate process. The transfer of assets occurs quickly, highlighting another important advantage. When costly funeral expenses are pending along with other bills, a speedy transfer alleviates stress for your loved ones, rather than contributing to it.
Beneficiaries can sometimes be challenged and overturned. But such efforts are lengthy and costly. Still, if an heir can demonstrate that Dad’s mental state was compromised or coerced when he was making financial decisions, she might have recourse. Also, the laws vary in each state, with a professional attorney most qualified to advise.
While deciding whom to name may be difficult, the process of designating a beneficiary is usually simple. Most institutions also make it easy to revise or update names whenever you want. And the option is always available to name more than one beneficiary and decide how much to allocate to each.
Most people designate their spouses, children or other relatives as beneficiaries. Many professionals recommend not assigning minors as such action often requires a court-appointed person to supervise the funds. They also warn against designating young adults as they tend to be too immature to handle a large chunk of money at once. Instead, trust accounts that allocate the timing of the release of funds till the young adults are a bit older offer more protection.
There are many other situations to consider. Those include having a disabled child, for example, or not designating any beneficiary at all. Tax consequences vary too depending on whether an estate, trust, beneficiary or several relatives are named. An experienced estate attorney and financial planner are ideally suited to provide specific recommendations.
At Silverman Financial, our goal is to help you create a financial plan that fulfills your dreams throughout your life and ensures your wishes beyond. We are experts in retirement planning and offer initial complementary consultations.