If you’re reading this article, odds are you have at least one of the following:
Retirement accounts, such as a 401(k) or IRA
If you don’t, then stop reading this article and go back to counting gold bullion and bullets in your doomsday shelter. If you do, then it’s important to recognize the importance of beneficiary designations.
What is a beneficiary designation?
Simply put, a 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 will supersede whatever is stated in a will.
Assets that are transferred by beneficiary designation generally avoid probate.
Because of those two things, beneficiary designations can be a very efficient way to ensure your money goes to the right party when the time comes. With that said, there are many things you need to keep in mind when updating your beneficiary designations.
Consideration #1: You should name a beneficiary for every account.
This sounds like a no-brainer, but it’s not. When you open a checking account, or move your 401(k) to an IRA, designating your beneficiaries probably isn’t top of mind. And if there isn’t someone prompting you to do this (like we do with our clients), then you’ll probably ‘check the box,’ and move on without ever revisiting this.
With that said, 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 from previous employers, revisit those too.
All banking accounts (checking, savings, and money market)
Life insurance policies
If you have a revocable trust with accounts established in the trust’s name, 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 have zero blanks in your beneficiary designations, you might not have the right person.
Consideration #2: You should update your beneficiaries as life events occur.
Did you get a divorce? Get married? Have kids? Have kids grown up and left the house?
Odds are, even if you designated someone as your beneficiary, that person (other than a life-long spouse) will probably not remain your beneficiary forever. In the military, there are tons of tales about the Sailor who:
Fell in love with a girl (or guy)
Had kids (not necessarily in this order)
Died without changing beneficiaries on their life insurance
Left their girl (or guy) destitute because their mom (or ex-spouse) kept the insurance money
It’s a sad story. Every time. And there is nothing that anybody can do about it. So while you’re ensuring that you have designated beneficiaries, take the extra step to ensure that everything is going to the right person.
Consideration #3: Designate secondary (or contingent) 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.
Having a secondary beneficiary designation on file allows the financial institution to proceed if the primary beneficiary isn’t able to receive the money.
Consideration #4: 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?
Without trying to solve all these problems in an article, understand that you might need to discuss special circumstances with your estate attorney (worth the cost, even though it sounds expensive).
For example, if you have children, designating them directly as a beneficiary 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.
Consideration #5: Review your beneficiary designations routinely with your estate attorney and 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 as needed, then 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—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 as part of a checklist of items to discuss when they talk about estate planning.
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. And if they don’t take the time to go over them with you, talk to us! We’d be more than happy to see how we might be able to help you out! Schedule a call now.