Raleigh NC Financial Advisor: Naming Beneficiaries

Have you named or updated beneficiaries for your financial accounts? You should. From savings to investments to insurance, it’s an important, simple detail you shouldn’t overlook.

What is a beneficiary?

A beneficiary is a person or entity that receives a deceased person’s assets. Beneficiaries can be people, charities or your estate. It’s common to designate beneficiaries on life insurance policies, retirement and investment accounts, property or other assets.

Naming a beneficiary is an essential part of estate planning. If you don't name one, your loved ones could go through a time-consuming process called probate to determine where your assets go.

How to designate a beneficiary

Beneficiaries should be designated for all of your important assets. These include life and other insurance policies, retirement and investment accounts, property and other goods in your estate. Most of these accounts allow you to name a beneficiary when you open the account, but you can still fill out a form online or in person to designate or change beneficiaries at any time. Contact your insurance provider or financial institution to request the necessary forms.

It’s a good idea to provide as much information as possible to avoid future confusion or legal conflict. Include your beneficiaries’ Social Security numbers and full names, especially if you have a complicated family situation, such as an ex-spouse or adopted children. You can name your beneficiaries in your will for property and the rest of your assets. 

10 tips about beneficiary designations

1. Remember to name beneficiaries. If you don’t name a beneficiary when one is called for, one of the following could occur:

• The account or policy may have to go through 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.

2. 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. If there is only one individual that you want to leave the money to, consider whether a charity (or charities) would be appropriate as the contingent beneficiary.

3. 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.

4. Read the instructions. Beneficiary designation forms are not all alike. Don’t just fill in names—be sure to read the form carefully.

5. 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.

6. 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 may not be what you originally intended.

7. 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 fail to name a beneficiary, or 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.

8. Use caution when naming a trust as beneficiary of certain assets. 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, a trust may get less favorable tax treatment. So be sure to understand the tax implications before you name a trust as a beneficiary.

9. 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.

10. Use disclaimers when necessary — but be careful. Sometimes a beneficiary may 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.

Types of beneficiaries

Primary

A primary beneficiary is your first choice: the first person who will receive the death benefit from your life insurance or the main recipient of the assets in your will.

Contingent

A contingent beneficiary — sometimes called an alternate or secondary beneficiary — will receive your assets or account benefits if your primary beneficiary is deceased or cannot be located. You can name multiple contingent beneficiaries and specify what they’ll each receive. 

Revocable

A revocable beneficiary can be changed without the beneficiary’s permission if the policy owner (the benefactor) is still alive. 

Irrevocable

An irrevocable beneficiary can’t be changed without written permission from the beneficiary. If there are multiple, all parties need to consent to any changes. Irrevocable beneficiaries may be named as part of a divorce settlement or other special circumstance.

Can I change my beneficiary?

Generally, you can change your beneficiaries at any time. As your life changes, it’s important to review—and maybe update—the beneficiaries on all your accounts. Things like marriage, divorce, a new child and death of a loved one can affect your financial plans and your beneficiary information.

Here’s how to make changes, depending on the account:

• On a life insurance policy, you can change your beneficiaries by contacting your insurance provider. You may have to fill out a form to confirm your change. Your policy may state whether you named a beneficiary revocable or irrevocable. You will need your beneficiary’s consent to change their status if irrevocable.

• With a financial account like a retirement or investment account, contact the financial institution. If you receive benefits through your employer, you’ll likely have the opportunity to revisit your policy choices during the annual enrollment period.

A will won't matter

A common misunderstanding is that a will declares who gets what. However, a beneficiary designation will override a will because it’s a contract with the financial institution that states funds are to be paid out to the specified person in the event of death. This happens before funds are released to an estate to be distributed by a will. If you’ve divorced then remarried and updated your will but not your beneficiary designation, your ex-spouse may end up with your life insurance, for example.

What happens if you don’t name a beneficiary? 

If there is no primary beneficiary, your life insurance death benefit will go to the estate.  Once in your estate, your death benefit may be used to pay your debt – and may also be subject to probate fees. Assets left over after paying debt and taxes are distributed in accordance with your will.  However, if a primary beneficiary and contingent beneficiary are named, and the primary beneficiary is no longer available, then it goes to the contingent beneficiary. 

The Bottom Line

If you care about the dispensation of your financial assets after you're gone, then choosing beneficiaries for your financial accounts should be a priority. By designating beneficiaries, you can ensure that your property winds up in the right hands.

Sources

https://www.1stunitedcu.org/more-for-you/financial-wellness/beneficiary-check-up

https://www.wellsfargoadvisors.com/planning/goals/estate-planning/beneficiary-designation-tips.htm

https://www.fidelity.com/learning-center/personal-finance/retirement/naming-beneficiaries-video

Disclosures:

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This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.