A beneficiary designation is a simple tool that plays a significant role in transferring your assets after you pass. Properly naming beneficiaries is an excellent way to efficiently distribute your assets to the right people.
If it’s been a while since you updated your beneficiary designations, now’s the time to double-check that you have the right people listed.
So, What’s a beneficiary designation, and why is it one of the most critical elements in your estate plan?
Let’s find out.
What’s A Beneficiary?
A beneficiary is a person or entity that inherits an asset from another individual after passing away. This documentation indicates a transfer of ownership and can be instrumental in the wealth transfer process.
You may see this category while filling out documents such as a life insurance policy, retirement account, etc. Not only can you name a beneficiary on those documents, but also any saving/checkings accounts, brokerage accounts, real estate you own, and more.
Many people think that beneficiaries must be direct family, but you can name anyone as your beneficiary, a neighbor, best friend, long lost cousin, etc., though many tend to stick with family.
The world is your oyster. You can even name entities like charities or institutions you value as beneficiaries. Doing so could be an excellent way to extend your legacy.
Now, let’s consider these facts.
The Big One—Official Beneficiary Designations Supersede What’s In Your Will
More often than not, people believe that their will is the most official document in their estate plan, but that’s not always the case. Any official designations and documentation of beneficiaries that live within an insurance policy, 401k, checking account, etc., will typically take precedence over what’s written in your will.
For example, say you named your sister the official beneficiary on your life insurance policy, but your will stated the death benefit should go to your brother. Your sister would likely get money since she was the official beneficiary of the insurance policy.
This mismatch could lead to arguments, miscommunications, and even a lengthy probate process. It’s even more challenging when you’re not there to help rectify the situation. When you’re gone, your documents outline your final wishes, so they must be updated.
As you can see, keeping your beneficiaries as up-to-date as possible is essential. You want to be sure your assets end up in the right hands with minimal hurt feelings and family misunderstandings along the way.
Forgetting to Name a Beneficiary Slows The Wealth Transfer Process
In cases where someone hasn’t named a beneficiary, the courts are in charge of determining what happens to your assets via probate. Probate can be lengthy, expensive, and public proceeding.
Rather than retaining the agency over your estate plan, your family will have to wade through intestacy laws and other proceedings actually to obtain the assets you left for them. In some cases, your family may end up with a different result than you initially intended.
For example, undergoing this process may be more costly than your family realized, which could eat into their inheritance. You’d likely rather have your money support your family and causes you to care about, not get absorbed into court and legal fees.
After understanding what a beneficiary is and considering who yours will be, you also need to think through the following.
When Should You Update Your Beneficiaries?
While updating your beneficiaries may not be the most exciting thing on your to-do list, it is a critical financial task. Even if you don’t need to update your beneficiaries just yet, it’s important to know exactly who is listed on all of your documents.
People typically find it beneficial to update their beneficiaries as often as every few years and/or after significant life transitions, such as;
- Employment change
Alongside primary beneficiaries, some accounts like your life insurance and retirement accounts offer the option for secondary beneficiaries. If the primary beneficiary passed away first, your secondary beneficiary would come into play if the primary beneficiary passed away first, adding more continuity to the wealth transfer process. Naming multiple beneficiaries can be a wise plan as you can’t predict future events!
Select Beneficiaries With Care
Your beneficiaries play an important role in your estate plan. So, as you select them, keep the following in mind:
- Be sure to think through all of the possibilities; who you select and why.
- Keep all listed beneficiaries up-to-date.
- Consider your choices with care because it can help bring a sense of stability to your loved ones during a difficult time.
If you take these steps and feel confident in your plan, you are headed in the right direction! If not, that’s okay, the nuances of retirement planning can be confusing and overwhelming, but we’re here to help. The value of your time, your family, and the well-being of your assets is significant to us, and we are willing to assist you as much as possible.
Our team can help you create an estate plan that highlights your legacy and makes the process as streamlined as possible for your loved ones. Set up a call with us today!