Understanding Beneficiary Designations

Having estate planning documents in place is important. It can bring you the peace of mind that comes with knowing your wishes will be fulfilled. It’s also important to assure that your assets will pass on the way you want them to. If you have retirement accounts, life insurance or annuities, a will and a trust is not enough. For these assets, you’ll need to address the beneficiary designations. 

Why are beneficiary designations so important? We’ve all heard stories of people leaving assets to someone they did not intend to. This can happen if your beneficiary designations have not been updated for a long time. I’ve seen designations that would leave an IRA to an ex-spouse or a deceased parent. Sometimes intended people were omitted such as when a child was born after the designations were put in place.

Many people think their will or trust controls how their retirement accounts or life insurance policies will pass. But regardless of what your will or trust says, the assets will go to who you named on the beneficiary forms. 

When naming beneficiaries, it’s important to keep the following in mind:

Name a beneficiary

If a beneficiary is not named, the account or policy may go through probate. This can be an expensive and lengthy process. And, the probate court may decide to pass assets to people you did not intend to.

Name both primary and contingent beneficiaries

You should always have a contingency plan in case the primary beneficiary dies before you.

Update for life events

Be sure to keep your beneficiaries current as your go through life events such as:

  • A divorce or remarriage
  • The birth of a child or grandchild
  • The death of a beneficiary

Coordinate beneficiaries with other estate planning documents

Beneficiary designations work independently of the other estate planning documents. It’s important to understand how both parts work together. Be sure to discuss the big picture with your estate planning attorney.

Use caution when naming a trust as beneficiary

With the new SECURE Act that was passed in December 2019, naming a trust as a beneficiary of a retirement account may not be the best option. Consult with your estate planning attorney to determine what the best choice is for the situation. The language in your trust may need to be updated as well.  

Consider naming a charity as beneficiary

If you have charitable intentions, naming a charity can be a good option. You or your heirs will not pay income tax when the assets are distributed to a charity. Neither will the charity. The charity you choose can benefit from the full amount of the assets.

Changing a beneficiary is easy

Changing the beneficiary designations on an account is as easy as submitting a new beneficiary form. There are no limits on how many times a beneficiary can be changed.

Beneficiary designations are an important part of your estate plan. You should know how your beneficiary designations fit into your overall estate plan and review your beneficiaries regularly. At Blankinship & Foster, we help make sure things like beneficiary designations are reviewed and discussed. With all the pieces in place, you can feel confident that you have a sound financial plan.

About Teresa Kakadelas

Teresa Kakadelas, CFP®, CDFA™ is a lead advisor and a member of the firm’s Executive Committee. Teresa heads up the firm’s Financial Planning Team, continually identifying and helping solve financial planning issues for clients. Teresa started the firm’s “Wise Women” luncheons, designed to help clients with financial education. Teresa and her family live in Carlsbad. She enjoys traveling, cooking and spending time with her family.

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