Steven Heinl, Partner, Hyatt & Weber, P.A.,
In the flurry of managing retirement, investment, and bank accounts, as well as insurance policies, it’s easy to forget to review and update beneficiary designations. Failing to pay attention can result in costly mistakes for you and your loved ones. Beneficiary designations override instructions in a will.
Fortunately, proactive planning eases the process. Keep these considerations in mind.
A beneficiary is a person or entity you legally designate to receive benefits from financial products such as a will; life insurance policy; qualified retirement plans, including 401(k), 403(b) and pensions; non-qualified brokerage accounts, and checking and savings accounts. Primary beneficiaries are first to receive an asset. Secondary and contingent beneficiaries receive the asset if the primary beneficiary passes away or disclaims the asset. While you have broad discretion in naming beneficiaries, be aware of options, such as a trust, when naming minor children or a special needs individual.
If you do not designate beneficiaries on an account or insurance policy, then the asset may default to probate, which is how assets are distributed under your last will and testament. While it may make sense for this to occur in some circumstances, in many instances you will want your assets to avoid probate, so your assets flow quicker to your intended beneficiaries.
Many people also choose charities as beneficiaries. You can name an organization you care about, such as Hospice of the Chesapeake, as a beneficiary to receive a percentage of a retirement asset or life insurance payout. Doing so can be an impactful way to amplify your giving.
Once you’ve made these decisions, don’t stop there. Review your designations annually—and especially after major life events such as marriage, divorce, remarriage, and the birth of children and grandchildren. You want to ensure your assets reach your intended recipients as needs evolve.
Consider: If you plan to leave assets to loved ones and your favorite charity, it may be tax advantageous to leave the remainder of your qualified retirement plan to the organization. The organization will not pay income tax on the inheritance. Then, you can fund gifts to loved ones with life insurance, which is passed on tax-free.
Takeaways:
- Be specific. Most beneficiary designations require a full legal name, relationship to you, address, date of birth, and (possibly) Social Security number. Read all forms carefully.
- Review annually. Check beneficiary designations on all financial accounts each year and after life events so they reflect your current intentions.
- Work smart. Turn to an experienced estates and trusts attorney and tax adviser to ensure you follow specific rules for your situation.
This article is for informational purposes and is the opinion of the author based on current interpretations of the law, which can change with future additional legislation. Your circumstances may require direct advice from your insurance, legal, tax and investment professional.
Steven Heinl is a Partner with Hyatt & Weber, P.A., and a member of the Hospice of the Chesapeake Planned Giving Advisory Council.
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