One of the easiest ways to ensure that your assets pass as you intend is by keeping your beneficiary designations up to date. Beneficiary designations are not only a way to assign some or all of your assets to an individual or trust at the time of your death, but they are also among the most efficient ways to avoid probate while distributing your assets.
Some of the key assets that can be distributed by beneficiary designations include life insurance, retirement plans and IRAs.
Be mindful that beneficiary designations supersede anything else you may have in writing, particularly a will. Therefore, if you name your spouse as beneficiary and subsequently divorce and remarry without updating the beneficiaries on these accounts prior to your death, then your new spouse is simply out of luck. While your will may be up to date, it will have no bearing on the assets with a beneficiary designation.
Often, people’s largest asset is their retirement plan at work, such as a 401(k), 403(b) or Thrift Savings Plan. While you have the option to designate anyone you choose as a beneficiary, most plans require that spouses not named as the primary beneficiary acknowledge with a notarized signature that they will not receive those benefits. Because the rules that govern these plans often favor the spouse for married couples, you must be proactive if your desire differs from the standard elections. In a society of blended families and second marriages, it is imperative for married couples to discuss each individual’s wishes, and then update the beneficiaries to reflect your intentions.
Divorce, or lack thereof, is also a critical factor in beneficiary designations. Some couples choose to separate from one another and allow years to pass without ever legally divorcing. As far as retirement plan administrators are concerned, that person is still your spouse. Therefore, be mindful that your estranged spouse is still entitled to your retirement benefits at the time of your death unless and until you submit a change of beneficiary and they acknowledge, in writing, their understanding that you have named someone else.
One common mistake is naming minor children as beneficiaries for life insurance and retirement accounts. While it may be your desire to leave your assets to your children, beware that minor children cannot legally own property. Instead, an adult must manage the account on the child’s behalf.
Therefore, it is advisable to consult with your estate planning attorney and tax adviser to determine whether it is appropriate to establish a trust for the benefit of your minor children.
As you consider your estate plan, make sure to keep the following in mind:
• Regularly review your beneficiaries. While your intentions may not change every year, they may change over time or at various milestones. Marriage, divorce, death, and births are a few of life’s events that should trigger a review of your beneficiaries.
• Avoid listing your estate as the beneficiary. One of the perks of beneficiary designations is that your beneficiaries avoid probate for those assets. Listing your estate as the beneficiary only complicates and delays the asset distribution process. Listing your estate as a beneficiary of a retirement asset such as an IRA or 401k can also lead to very adverse income tax consequences.
• Take advantage of contingent beneficiaries as well. Since beneficiary designations are intended to simplify the asset transfer process, make sure to name both primary and contingent beneficiaries. Doing so guarantees that if your first choice dies before or with you, someone else of your choosing is named to receive those benefits.
Death is a stressful time, but you can simplify the administrative aspect of it for those that you care about. Confirm that your beneficiaries reflect your current wishes, and take steps to make any necessary changes today.
Life is a journey, plan for it.
Ashleigh Brooker, CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Reach her at info@AJBrooker.com or (803) 724-1235.