When you think of “Estate Planning”, most people think of wills, trusts, advanced directives, powers of attorney and other important documents you need at the end of your life. However, some of the most important estate planning that you can do doesn’t require an attorney. It only requires that you assign beneficiaries to your assets like 401k(s), IRAs, pensions and life insurance and keep them up to date and relevant.
When you assign a beneficiary to an asset, it avoids the time, expense, and public nature of the probate process. You can assign secondary (contingent) beneficiaries to receive your asset if your primary beneficiary predeceases you. A common beneficiary designation is ‘per stirpes’ meaning that your beneficiary’s children inherit their parent’s share if their parent dies before you. You can split your asset between multiple beneficiaries.
You can assign beneficiaries to many types of assets, including:
- bank accounts – this is called Transfer on Death (TOD) or Payable on Death (POD)
- joint account – you can often assign a beneficiary that would inherit when both owners have passed
- 529 college savings account – for example, you can specify ownership to transfer to “my spouse, otherwise my child’s guardian”
- employer retirement plans – often you must have your spouse sign a waiver if you want to specify a primary beneficiary other than your spouse.
- employer pensions – often only a spouse is eligible to receive any benefit at your death
- US savings bonds – if you bought your bonds online or transfer them to online format, you can easily change beneficiaries any time
- Health Savings Accounts (HSAs) – a spousal beneficiary can treat it as their own, otherwise the money is distributed as taxable income
- IRAs – naming your spouse as the beneficiary allows your spouse to take penalty-free distributions after your death regardless of their age. Naming a non-spouse allows the beneficiary to spread taxation over their lifetime
- If you do not specify any beneficiary, you may have default beneficiaries as a result of signing account opening paperwork – regardless of what your will says. For example, a common default is “spouse, otherwise children, otherwise parents”, which for a single person might leave their IRA to their elderly mother in a nursing home rather than their sibling.
- If you do specify a beneficiary, it often stays in effect regardless of changing circumstances, which for a divorced individual could leave their IRA to an ex-spouse rather than their children or their new spouse.
Beneficiary designations are a very important estate planning consideration and need to be periodically reviewed and updated; especially at major life events. It is very simple to update any beneficiary and usually only requires a simple form.
This information is simplified for readability. You should consult your financial advisor for advice specific to your situation, and your attorney for any legal advice.
This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Jennifer Climo, CFP®, CPA, MSFP is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.