Estate planning involves more than just drafting a will. A critical but often overlooked aspect is beneficiary designations. This blog post explains why naming beneficiaries is essential. It also covers how to properly designate beneficiaries for various assets like life insurance and retirement accounts to ensure your estate plan is effective and your loved ones are protected.  

Why Do I Need to Name a Beneficiary? 

Your will does not control who inherits all your assets when you die. Some assets – such as life insurance, annuities, and retirement accounts (pensions, 401(k) plans, 403(b) plans, and IRAs) – pass to heirs by beneficiary designation. A beneficiary designation allows your heirs to receive assets quickly and easily at your death, avoiding the probate process. Probate can be time-consuming and costly, and it is always open to public scrutiny.  

Who May Be a Beneficiary? 

You may assign a contingent beneficiary to receive the asset if your primary beneficiary predeceases you. For example, the primary beneficiary may be a spouse, with Child A as a contingent beneficiary. You may designate multiple beneficiaries to receive shares of an asset. For example, Child A receives 50% and Child B receives 50%. Using a per stirpes designation ensures that your beneficiary’s children will inherit their parent’s share if their parent dies before you. In this case, if Child B predeceases you, B’s children inherit B’s 50% in equal shares. Many financial firms allow you to check a box to add per stirpes to a beneficiary designation, as in “Child A per stirpes.” 

You may also designate an entity, such as a trust or a charity, to receive your assets. If you name a minor child as a beneficiary, that child cannot receive the funds outright. Consider using a trust to avoid court appointment of a guardian.  

Assets That Pass to Heirs by Beneficiary Designation

Several types of assets allow for the designation of a beneficiary, simplifying the transfer of assets at death: 

• Life insurance – Death benefits are paid directly to the beneficiary(ies). 

• Annuities – Prior to payout, a beneficiary designation transfers the contract value at death. 

• Employer retirement accounts and pensions – Certain plans require that your spouse sign a waiver if you want to name a primary beneficiary other than your spouse. 

• Individual Retirement Accounts (IRAs) – If your spouse inherits your IRA, they may treat the account as their own and take distributions over their lifetime. Naming a non-spouse beneficiary generally results in a 10-year payout period, with certain exceptions. 

• Equity compensation plans – You may be able to designate a beneficiary on a stock option or employee stock purchase plan ESPP. 

•  Health Savings Accounts (HSAs) – If your spouse inherits your HSA, they may treat the account as their own and continue the tax benefits. Non-spouse beneficiaries receive the account as taxable income when you die. 

• 529 college savings accounts – In this context, you are transferring ownership of the 529 plan at your death. This is done by assigning a “successor owner.” 

• U.S. savings bonds – If you hold your bonds in electronic format on TreasuryDirect.gov, you can easily submit or change a payable on death (POD) beneficiary designation online. 

• Bank and online savings accounts – You may name a beneficiary using a POD designation. 

• Brokerage accounts – You may name a beneficiary using a transfer on death (TOD) designation. 

What If I Don’t Name a Beneficiary?

If you do not name a beneficiary, it is not always clear who is entitled to the money. Some types of assets have a default order of payment in case no beneficiary is listed. This may or may not align with your wishes. For example, a common default is “spouse, otherwise children, otherwise parents,” which, for a single individual, could leave an IRA to an elderly parent in a nursing home, rather than to siblings. Oftentimes the default is to pay to your estate, which draws the asset into the probate process, causing undue delay and expense and perhaps unintended consequences. 

When to Update Your Beneficiaries

It’s important to review your beneficiary designations periodically, especially following a divorce, a marriage, a birth, or the death of someone you named as a beneficiary. A beneficiary designation remains in effect unless you make a change. It is not uncommon for an outdated beneficiary designation to name a deceased parent or an ex-spouse. 

Conclusion 

Beneficiary designations are an important estate planning consideration and need to be periodically reviewed and updated. Implementing an estate plan can be complicated. You don’t have to do it alone. If you need assistance with estate planning as part of your overall financial plan, please reach out to our team. Your fee-only financial advisor can work with you and your estate attorney to ensure that beneficiary designations are complete, consistent with your overall estate plan, and well documented.