When was the last time you updated your beneficiary designations on your various retirement and insurance accounts? If you’re like most people, you added beneficiaries when you filled out the paperwork to open the account and haven’t revisited the designations since that time.
While you might mistakenly think of this as a ‘set it and forget it’ decision, there are many reasons you should review and update a beneficiary designation regularly.
The most important reason to review your beneficiary designations is to make sure your wishes are actually set. Whether due to an oversight or a clerical error, it’s not uncommon for accounts to have no assigned beneficiaries in place. Attention to detail should prevent this error, but it is possible for your paperwork to be processed with this omission and your accounts could be missing this critical information. If you do not select a beneficiary, many accounts will assign a default, such as your spouse or your estate, which may not align with your intentions.
Another reason to review your beneficiary designations is that your wishes may have changed. As you move through different stages of life, it makes sense that your beneficiaries would need to be adjusted due to marriage, divorce, death of a spouse, or the birth or adoption of a child or grandchild.
The need to revisit your beneficiaries could stem from anything that changes your perspective on who you would like to receive the money after your death. Perhaps you’ve had a falling out with a family member and you’d rather not include them as an heir. Your adult child married someone you consider untrustworthy and you are concerned about what they will do. The charitable organization you planned to support no longer aligns with your values.
No matter how certain you are of your wishes now, they can always change. Be sure to review your accounts regularly and update them as needed.
Who to Name as Beneficiary
A common misconception is that your beneficiary has to be your spouse. The fact is, you get to choose where the money goes after your passing. It can go to your children, grandchildren, favorite niece, godchild, sibling, close friend, unmarried partner, charitable organization, trust, or virtually any person or entity you choose. Just remember that if you name a trust, the money will pass through your estate and be subject to probate.
Think carefully about who you select as both the beneficiaries and the contingent beneficiaries to ensure they are consistent with your current wishes and that it will not cause unintended hardship on that person or their family. As an example, we explain why it’s usually advisable to avoid naming a minor directly or a special needs individual.
If you’ve named a minor as a direct beneficiary of your retirement or life insurance accounts, the assets will be transferred in the beneficiary's name when they reach the state’s legal age of 18 or 21. It might not be in their best interest to receive a large sum of money at such a young age. Instead, you might want to switch the designation over to a living or revocable trust with provisions for the minor as a beneficiary of the trust; however, we always recommend consulting with your tax or financial professional regarding the specifics of transfers, titling, and withdrawals.
In the case of special needs or disabled individuals, naming them as direct beneficiaries could become a problem if they are receiving or may need to receive government aid for their disability. The inheritance may unintentionally disqualify them from getting the government benefits they need. If this happens, they would have to “spend down” the sum until they qualify again and reapply for benefits. Setting up a special needs or supplemental trust could be a better option.
To ensure your beneficiary designations match your current wishes, you’ll want to review them often. Pick a regular time each year to look them over, such as the start of the year or when you do your taxes; it only takes a few moments. Checking your beneficiaries yearly at minimum is wise because you may have changed your mind without remembering to make an adjustment at the time.
It’s also always a good idea to revisit your designations after every major life event, such as marriage, divorce, or having a child.
Make a list of the accounts you’ll want to review each year and with each life event to make sure you are covering your bases. The list should include all of your life insurance policies, individual retirement accounts, company 401(k), and other accounts that will not pass through your estate upon your death. Check with the individual institution or advisor to confirm the paperwork and see to it that designations are in place.
It’s critical to ensure your beneficiary designations are in place and updated. If not, the accounts may pass through your estate and potentially be exposed to probate and your creditors. If this happens, your heirs may miss out on the opportunity to take advantage of possible tax deferral savings.
But if you designate your beneficiaries properly, your retirement account assets will not have to go through the probate process. You should name both primary and contingent or alternate beneficiaries, in case the primary dies before you or at the same time as you.
The Bottom Line
Selecting beneficiaries for your life insurance and retirement accounts is an important part of estate planning. If you are not careful, your money could easily fall into the wrong hands—an ex-spouse or an old roommate you haven’t spoken to in years. The good news is, it takes very little time to check your accounts and updating them is generally a fairly easy process.
Robert "Fenn" Giles, Jr., MBA, CIMA® is a founding partner of Wealth Advisors of Tampa Bay (WATB) and acts as the firm’s President and Chief Investment Officer. WATB is an independent Registered Investment Advisor (RIA) located in Tampa, Florida. Learn more about them at wealthadvtb.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.