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Reminder to review your designated beneficiaries annually

Designated Beneficiary Explained

A Designated beneficiary is an individual or entity that is specifically named in a legal document, such as a will or trust, to receive a specific benefit or asset. In the context of financial planning, designated beneficiaries play an important role in determining how assets will be distributed after an individual’s death.  Beneficiary designation is a way to immediately transfer assets to a designated person upon the original owner’s death. It is commonly used in retirement accounts and life insurance policies, but can also apply to vehicles, bank accounts, and smaller properties. These designations bypass the probate process and are subject to federal and state rules. Beneficiary designation supersedes prenuptial agreements, divorce proceedings, and avoid probate.

Life Insurance Policy’s have a Designated Beneficiary

One of the most common examples of a designated beneficiary is a life insurance policy. When an individual purchases a life insurance policy, they will typically name a beneficiary, who will receive the death benefit in the event of the policyholder’s death. The death benefit from a life insurance policy is generally tax-free to the beneficiary, but it may be subject to estate taxes if the policy is owned by an irrevocable trust.

Retirement Accounts

Another example of a designated beneficiary is a retirement account, such as an IRA or 401(k). These types of accounts typically require the account holder to name a beneficiary, who will receive the funds in the account after the account holder’s death. The tax implications of a designated beneficiary for a retirement account depend on the type of account and the beneficiary’s relationship to the account holder.

Wills and Trusts

Designated beneficiaries can also be named in other types of legal documents, such as wills and trusts. The tax implications of a designated beneficiary for a will or trust depend on the type of asset and the beneficiary’s relationship to the grantor.

Unless you have a Trust – Don’t Make Your Estate The Beneficiary 

Don’t name your estate as the beneficiary. If your estate is the beneficiary, then the funds in your IRA, annuities, life insurance policy and other financial investment accounts will go through probate – thus costing your heirs money and stress. However, you may designate your trust as the beneficiary.

Changing  a Designated Beneficiary

It is important to note that designated beneficiaries can be changed at any time. It is also important to update the beneficiaries on legal documents such as wills, trusts, and insurance policies whenever there is a major life event, such as a marriage, divorce or birth of a child.

Tax Implications

It is also important to note that there are tax implications associated with designated beneficiaries. It is important to consider these tax implications when choosing a designated beneficiary, and consult with a tax advisor if needed.

Keep your Beneficiary Designations Updated

It is important to keep beneficiary designations updated as they override wills and prenuptial agreements. An estate can also be named as a direct beneficiary, but this usually adds extra cost and hassle to the process. A beneficiary designation can be a useful tool for maximizing the amount of an estate passed on to loved ones, and it’s worth looking into for other assets and accounts.

Other Types of Designated Beneficiaries 

In addition to designated beneficiaries, there are several other types of beneficiaries that may be named in legal documents. One type of beneficiary is a residuary beneficiary, who is named to receive any assets that are not specifically distributed to other beneficiaries. Another type of beneficiary is a contingent beneficiary, who is named to receive a benefit or asset in the event that the primary beneficiary is unable to do so. A third type of beneficiary is a taker in default, who is named to receive a benefit or asset in the event that no other beneficiaries are able to do so.

Consulting with an Attorney

It is important to note that different legal documents may have different rules and requirements for naming beneficiaries, and it is important to consult with an attorney to ensure that your wishes are properly reflected in your legal documents.

Communication with Beneficiaries

It’s also essential to have a conversation with your beneficiaries about your plans, so they are aware of the assets they will be inheriting and can plan accordingly. By keeping an open line of communication and having a clear plan in place, you can ensure that your assets will be distributed according to your wishes and your beneficiaries will be taken care of.

Conclusion

In conclusion, designated beneficiaries play an important role in financial planning, but there are other types of beneficiaries such as residuary, contingent, and taker in default. Each of them has a different role and it’s important to consult with an attorney to ensure that your wishes are properly reflected in your legal documents. It’s also essential to have a conversation with your beneficiaries about your plans to ensure that your assets will be distributed according to your wishes and your beneficiaries will be taken care of.

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