Naming a beneficiary is a vital step in estate planning as it involves choosing someone to receive the benefits from financial or legal arrangements, such as a life insurance policy, retirement account, or will.
It must be remembered that only a living person or organization can be named as a beneficiary. A non-living entity, such as a corporation, limited liability company, or partnership, cannot be named.
Naming multiple beneficiaries will divide the assets in the account equally among them. Therefore, one must make a wise choice of beneficiaries and understand the implications and responsibilities involved.
Life Insurance Policies Require a Named Beneficiary
Life insurance policies are often one of the first things people think of when they hear the term “named beneficiary.” A life insurance policy is essentially a contract between the policyholder and the insurance company. The policyholder pays regular premiums in exchange for a death benefit paid to the named beneficiary in the event of their death. The death benefit can be used to pay for funeral expenses and to settle outstanding debts. It can also provide for the financial needs of the policyholder’s loved ones. It is important to review and update the named beneficiary on a life insurance policy regularly. Too often, life circumstances and relationships can change over time.
Retirement Accounts
Retirement accounts, such as individual retirement accounts (IRAs) and 401(k) plans, also allow the account holder to name a beneficiary. After the account holder’s death, the balance in a retirement account distributes to the named beneficiary, which make this designation important. This feature avoids the passing through the probate process and potentially being subject to taxes and other claims. You can change the named beneficiary at any time. We highly recommend reviewing and updating this designation regularly, especially in the event of a major life change, such as divorce or the birth of a child.
A Named Beneficiary in a Will
A will is another important document in which a named beneficiary can be designated. This legal document outlines the distribution of an individual’s assets upon their death. A named beneficiary in a will can be any person or entity, including a spouse, children, friends, charities, or a trust. It is important to consider the tax implications and other legal considerations when naming a beneficiary in a will. Again it is advisable to review and update the will regularly to ensure that it accurately reflects the individual’s wishes.
Other Financial Arrangements
In addition to these common financial arrangements, there are many other types of contracts and agreements in which a beneficiary can be designated. Some of these include annuities, trusts, and powers of attorney. The named beneficiary in these arrangements may have varying degrees of control over the assets. It is important to carefully review the terms and conditions of each arrangement to understand the responsibilities and obligations of the named beneficiary.
Personal and Emotional Impact
When naming a beneficiary, it is important to consider the impact the designation will have on the individual’s financial & legal situation. For example, naming a minor child as a beneficiary may result in the need for a guardianship or a trust to be established. Naming a spouse as a beneficiary may have tax implications or other legal consequences. It is also important to consider the possibility of the named beneficiary predeceasing the account holder. This too could have an impact on the distribution of assets.
In addition to the legal and financial considerations, it is important to consider the personal and emotional impact of naming a beneficiary. Naming a beneficiary can be a complex and emotional decision. It involves making decisions about the distribution of assets and providing for loved ones after death. It is important to communicate with the named beneficiary and other family members. This allows you to ensure that everyone understands the designation and to address any concerns or questions they may have.
Review and Update
It is important to regularly review and update the named beneficiary designation regularly. Too often there are a major life changes such as a divorce, a birth, and even death of a beneficiary. With today’s technology, try to set your phone every year to update your named beneficiaries. Whatever documents you have for estate planning, make sure you register them with The U.S. Will Registry.
