10 reasons beneficiary designations matter
Designating a beneficiary can be a relatively simple way to transfer an account or an insurance policy upon your death. However, if you’re not careful, missing or outdated beneficiary designations can easily derail your estate plan.
We often complete these designations without giving it much thought, but they are actually important and deserve special attention. Here’s why: Beneficiary designations take precedence over what is in other estate planning documents, such as a will or trust.
For example, you can indicate in your will that you want everything to revert to your spouse after your death. However, if the beneficiary designation on your life insurance policy still names your ex-spouse, he or she could end up receiving the proceeds.
Where to find them
Here is a sample of places where you will find beneficiary designations:
- Employer-sponsored pension plans [401(k), 403(b), etc.]
- Life insurance policies
- Transfer on Death (TOD) Investment Accounts
- Payment on death (POD) bank accounts
- Stock options and restricted shares
- Deferred executive compensation plans
With you being asked to name beneficiaries across so many different accounts and insurance products, it can be difficult to keep up. However, it is worth it; not maintaining the beneficiary designation on that 401 (k) of three employers there could mean the money will go to the wrong place.
When you first set up your estate plan, go over all of the designations you made previously and align them with your plan. After that, you need to review and update them regularly, at least once a year.
10 tips on beneficiary designations
Because beneficiary designations are so important, keep these things in mind in your estate planning:
- Remember to name the beneficiaries. If you do not name a beneficiary, one of the following can occur:
- The account or the police may have to go through the probate court. This process often results in unnecessary delays, additional costs and unfavorable tax treatment.
- The agreement that controls the account or the policy may provide for “default” beneficiaries. This could be useful, but the default beneficiaries may not be what you want.
- Name the primary and subsidiary beneficiaries. It is good practice to name a “contingent” or contingent beneficiary in case the primary beneficiary dies before you. Depending on your situation, you may only have one primary beneficiary. In this case, consider whether a charity (or charities) can be identified as a potential beneficiary.
- Update for life events. Regularly review your beneficiary designations and update them as needed based on major life events, such as births, deaths, marriages and divorces.
- Read the instructions. Not all beneficiary designation forms are created equal. Don’t just fill in names – be sure to read the form carefully.
- Coordinate with your will and confidence. Whenever you change your will or trust, be sure to discuss your beneficiary designations with your lawyer. Since these designations work 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 set up three accounts of equal value and name a different child as the beneficiary of each. Over the years, the accounts can grow unevenly, so the kids end up receiving different amounts, which is not what you originally expected.
- Avoid naming your estate as beneficiary. If you name 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 need to be probated. For IRAs and qualified retirement plans, there may also be adverse tax consequences.
- Be careful when naming a trust as a beneficiary. Consult with your lawyer or CPA before naming a trust as the beneficiary of IRAs, qualifying retirement plans, or annuities. There are situations where it makes sense to name a trust – for example if:
- Your beneficiaries are minor children
- You are in a second marriage
- You want to control access to funds
Even in such cases, understand the tax consequences before naming a trust as a beneficiary.
- Be aware of the tax consequences. Many assets transferred by beneficiary designation have specific tax consequences. It is helpful to work with an experienced tax advisor, who can provide you with planning ideas for your particular situation.
- Use disclaimers if necessary, but be careful. Sometimes a beneficiary may want to refuse (forgo) the assets on which they are named as beneficiary. Keep in mind that disclaimers involve complex legal and tax issues and require extensive consultation with your lawyer and CPA.
- When creating, updating, or simply revising your estate plan, pay attention to your beneficiary designations.
- Remember that 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 each year so you can keep them up to date.
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Wells Fargo Advisors and its affiliates do not provide tax or legal advice. Please consult your tax and / or legal advisers before taking any action that may have tax and / or legal consequences.
Joseph G. Di Giacomo
Senior Vice-President – Investment Officer
Wells Fargo Consultants | 131 Continental Drive, Suite 102, Christiana Executive Campus | Newark, DE 19713
Phone 302-731-2131 | Toll free 800-355-2130 | Fax 302-731-7111
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Joseph G DiGiacomo Senior Vice President 302-266-2888 direct
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