Writing a will can be a depressing subject few people want to talk about or consider. Nonetheless, it’s a critical step in the estate planning process. It helps you get your legal and financial affairs in order, thus saving your loved ones a lot of headaches. But how do you start planning for a designated beneficiary?
When planning your estate, the chances are you’ll have multiple beneficiaries. Determining who gets what can get confusing. Often, those who take the designated beneficiaries’ route have limited information about it.
In this regard, we’ve prepared this detailed guide to making estate planning more straightforward.
What is a Designated Beneficiary?
Beneficiary designation implies transferring assets to individuals directly, without considering your will’s terms. A designated beneficiary is an individual or entity named in a will to inherit assets like the balance of a life insurance policy, annuity, or an individual retirement account when the assets’ owner dies. You can designate beneficiaries when establishing a retirement account, financial account, or life insurance policy. You should also review these designations regularly.
During estate planning, most people designate family members and friends as their beneficiaries. Nevertheless, you can also name your estate as the designated beneficiary. The assets in question will become part of your estate when you die and distributed as per your will.
In this case, the account and funds will be treated differently according to your relationship with the designated beneficiary. For instance, selecting your spouse as an IRA beneficiary allows them to transfer the assets to their own IRA accounts when you die. The same does not apply to non-spouse beneficiaries.
Primary vs. Contingent Beneficiary
Multiple beneficiaries can become designated. Upon death, the assets will become disbursed among more parties besides the primary beneficiary. Furthermore, you can select more than one secondary beneficiary. Even so, the primary beneficiary will have priority while distributing the assets. The secondary or contingent beneficiary will be next in line to receive the assets if the primary beneficiaries die before the asset owner, don’t accept the asset, or cannot be located.
The issue of revocability also comes into play when designating beneficiaries. Designated beneficiaries can either be revocable or irrevocable. In the case of a revocable beneficiary, an asset owner can make changes at any time. Conversely, an irrevocable beneficiary guarantees certain rights, which cannot get amended or denied.
Who Cannot be a Designated Beneficiary?
Almost anyone or anything can become designated as a beneficiary during estate planning, including charities, trusts, and individuals. However, there are several exceptions. For instance, depending on your home state, children under the majority age (18 or 21 years) cannot become designated as beneficiaries of annuities, retirement plans, or life insurance policies.
Moreover, if you want to designate an individual with special needs as a beneficiary, or a chronically ill individual, you may want to consider the possible consequences. Will receiving the assets affect that individual’s eligibility for government-provided benefits? Will an intellectually impaired individual be able to manage the assets well?
In such cases, you may want to consult estate planning experts to determine your options.
Why Should You Have a Designated Beneficiary?
Designating beneficiaries during estate planning ensures your loved ones are well looked after when you die. Typically, designated beneficiaries receive some direct payout without undergoing the probate process. By allowing assets to pass directly to the designated beneficiaries, the designations help bypass the time and costs associated with the probate process.
The assets passed via beneficiary designation are easier to access than those that go through probate. Assets become transferred to the beneficiaries immediately after death. The designations are also easy to make and amend. Even so, many people often neglect their beneficiary designations after making them. A case in point is when someone forgets to update their beneficiary designations after marriage, after having a second child, or after losing a parent.
A common misconception among most people is that their will override other designations that control how assets will become disbursed after death. However, that’s far from the truth.
When beneficiary designations are implemented on an account, the contract provisions outlining ownership and distribution will become active. Different financial accounts stipulate options for account ownership and transfer when someone dies. Moreover, some account agreements are considered more important than wills.
If you fail to name beneficiaries of your nonretirement assets, the assets will be added to your estate and divided according to your will when you die. On the flip side, designating beneficiaries means that the assets will go directly to them.
Keeping Beneficiary Designations Current
Since beneficiary designations go into effect as soon as you die, they override your will. Thus, keep them current to prevent your assets from transferring to unintended individuals. Suppose you remarry but forget to change your annuity or life insurance beneficiary from your ex to your current spouse.
If you die, your ex will receive those assets even if you didn’t want them to receive anything. Furthermore, if your designated beneficiaries predecease you, yet you’ve not updated your primary or contingency beneficiary designations, the assets in question may pass to your estate and become subject to the probate process. Similar circumstances may also arise if your designated beneficiaries (primary or contingent) predecease you before you update your designations.
You may want to do the following to keep your beneficiary designations current:
- Review the designations annually, preferably when filing your taxes.
- Review the designations after significant life events such as marriage, divorce, childbirth, or a change in financial status.
- If you switch insurance carriers or retirement plans, check with the provider to confirm their beneficiary designation options. What you have with your previous provider may not become transferred to the new provider.
Making and updating beneficiary designations is a critical aspect of estate planning. It cushions your loved ones from financial ruin when you die by avoiding probate when those assets become part of your estate.
If you need help creating beneficiary designations, The US Will Registry provides all the necessary tools, guides, and resources. With these, you can plan your estate professionally and update your current beneficiary designations as needed.