Most types of financial accounts allow you to designate a beneficiary, from checking and savings accounts to life insurance policies, 401(k)s, IRAs, pensions, and trusts. But when was the last time you looked at your beneficiary designations across all your accounts? Do you know which of your accounts have beneficiary designations and which ones do not?
If your circumstances have changed since you started your career and began accumulating assets—for example, if you have married, had children, or divorced—you may find that your designations are woefully out of date. Below, we discuss three of the most important reasons to regularly review and update your beneficiaries.
#1: Your Assets May Not Go to The Right People
Failing to periodically review and update beneficiaries can prevent assets from going where you would like them to go, placing additional burdens on those who are already grieving your death.
The last thing anyone wants is for their loved ones to deal with financial struggles while also dealing with the trauma of loss.
One common example occurs when someone has not changed their beneficiary after divorcing and remarrying. Upon the person's death, the accounts on which their ex-spouse is still named as beneficiary may flow to the ex-spouse instead of the current spouse, reducing the assets the widow or widower has available.
#2: Your Will May Not Be Enough to Direct Your Assets
Many assets pass outside of probate, so having outdated beneficiaries impacts your heirs.
You may assume that if you have a valid will, your assets will go to those you have named. But many assets pass outside the probate process, like life insurance policies and joint bank accounts. Trust assets also do not go through probate. Your heirs may ultimately find that your will disposes of a relatively small amount of your estate.
Some of the types of accounts that may pass outside of probate include:
- Whole or term life insurance
- Joint checking or savings accounts
- Assets held in a trust
- Assets held jointly with another person (like a home or vehicle)
- Any accounts with a transfer-on-death (TOD) designation
Only by periodically reviewing your beneficiaries can you help your heirs avoid the extensive and expensive process of suing to recover the assets you intended them to receive.
#3 Your Beneficiaries May Get a Whopping Tax Bill
There are tax-efficient and tax-inefficient ways to pass your assets on to the next generation—and if you are like most people, you want to save as much in taxes as you can. This can require you to discuss your beneficiary designations with a financial professional to see the best way to set up your assets and estate.
It is not just about saving money—in some cases, a sudden windfall could actually pose a problem for your heirs.
For example, a loved one may have a special needs trust that can provide funds for their care without running afoul of Medicaid's asset test; another loved one may receive income- or asset-tested government benefits like Section 8 housing or food stamps. If you name this person as a beneficiary and these assets pass directly to them, they could be "countable" for government aid purposes, causing the beneficiary to become ineligible for future aid.
As you can see, there is more to your beneficiary designations than may meet the eye. If it has been a while since you have reviewed your beneficiaries, get in touch with your financial professional today.