People often assume their will determines who inherits their assets, but that’s not always the case. Many of your most valuable accounts, such as retirement accounts, life insurance policies, and annuities, pass directly to the people you’ve listed as beneficiaries, regardless of what your will says. That’s why reviewing and updating beneficiary designations regularly is one of the simplest yet most critical steps in keeping your estate plan current and effective.
What are beneficiary designations?
Beneficiary designations are the individuals or organizations you name to receive the proceeds from specific accounts when you pass away. These designations are typically found on 401(k)s, 403(b)s, 457s, Traditional and Roth IRAs, life insurance policies, annuities, and transfer-on-death (TOD) or payable-on-death (POD) accounts. When you complete the beneficiary form for these accounts, that designation overrides your will. Even if your will names a different person, the financial institution will follow what’s written on your account form.
Why does updating matter?
It matters because life changes, and your beneficiary list should change with it. Common life events that should trigger a beneficiary designation review include marriage or divorce, birth or adoption of a child or grandchild, death of a previously named beneficiary, significant financial changes (such as new accounts or insurance policies), or relocation to a different state. For example, it’s surprisingly common for someone’s ex-spouse to remain listed as a life insurance beneficiary years after a divorce, unintentionally disinheriting children or a new spouse.
Primary vs. contingent?
Primary beneficiaries receive the asset first. Contingent, or secondary, beneficiaries inherit only if the primary beneficiaries have passed away. Having both beneficiary types listed on your accounts creates the mechanism for your assets to pass smoothly even if something unexpected occurs.
What are a few common mistakes?
- Leaving it blank: If you don’t name a beneficiary, the account may default to your estate, creating unnecessary probate costs and delays.
- Not specifying percentages: If you list multiple beneficiaries, clearly assign percentage shares to prevent confusion.
How often should you review your beneficiaries?
You should review the beneficiaries on all of your accounts at least once a year, and anytime your life circumstances change. Many financial institutions allow you to view and update designations online. It’s quick, easy, and can save your family future stress and expense.
Are you coordinating with your estate plan?
Your beneficiary designations should align with your broader estate plan. If you’ve created or updated a will or trust, double check that your accounts follow the same intent. It’s also a good idea to provide your financial advisor, attorney, and executor with a list of your current designations for reference.
Updating beneficiary designations may feel like a small task, but its impact can be enormous. You can ensure your wishes are honored, your loved ones are protected, and your estate settles efficiently with fewer legal hurdles. If you haven’t reviewed your beneficiary designations recently, now’s the time to check it off your financial to-do list.
Disclaimer: The information above is for general educational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. You should consult with your CPA and/or attorney before implementing any estate planning, gifting, or tax-related strategy.