Broker Check

What is a Beneficiary? (and why is it important?)

| May 16, 2019
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Any time you open a new financial account you will more than likely been asked to name a beneficiary. That includes a retirement account, pension, life insurance policy, or a banking account. 

What’s a beneficiary?

Your beneficiary is the person or entity (such as a trust) that will receive all or a portion of the assets in your account when you die. It is also common for an account to have both a primary and a contingent beneficiary. Your contingent beneficiary would receive your assets in the event that your primary beneficiary is also deceased. For example, many people will list their spouse as the primary beneficiary but list their trust as the contingent beneficiary, so if in the instance that both spouses were to die in an accident, the account would be transferred to their trust. Hopefully avoiding unnecessary confusion or probate upon your death.

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Why is it important to name beneficiaries?

While reading this, you may be saying, “but Anne, I just updated my will last year, so I don’t need to worry about naming beneficiaries!” That is not necessarily the case. 

One of the first things you need to know is that, in many cases, beneficiary designations supersede a will. For instance, the beneficiary designation on that 401k from a former employer, or that life insurance policy you purchased in your twenties, will trump anything that is written in your will if the two do not match. That said, not only is naming a beneficiary important but also it is equally important to make sure that your beneficiary arrangements are consistent with your other estate planning documents.

Not All Beneficiary Designations Are the Same

You can name a beneficiary for many different financial products and investment vehicles. And each has some subtle nuances that are sometimes difficult to discern. In addition, because naming a beneficiary is a legal arrangement, there is certain language you must use to ensure that your wishes are accurately recorded and executed. That's why it is important to consult with a qualified financial professional when making decisions about beneficiaries. Aside from determining who you will name as your beneficiary, you'll also need to consider the following:

  • Age of beneficiary: Most policies and plans will not directly transfer assets to minors until a trustee or guardian is approved by a court.
  • The ability of a beneficiary to manage assets: Perhaps a trust set up in the person's name would be better than a direct transfer.
  • Pension plans: Unless waived by the spouse in writing, the law requires a spouse to be the primary beneficiary of the account. 

Naming beneficiaries is a complex matter that requires a great deal of forethought to help ensure that your decisions are in concert with your financial and estate planning goals. This is why it is so important to keep your beneficiaries up to date. You wouldn’t believe how many people have accounts with ex-spouses or deceased relatives still listed as the beneficiary.  Luckily, with the advent of new technology, it can be a relatively simple process to update your beneficiaries.

Schedule a Beneficiary Review Meeting

Having a beneficiary review with your financial advisor is one option for making sure everything is in the correct order. Such a meeting can also be a great opportunity to invite your beneficiaries – especially if they are your adult children. That way your kids who will be inheriting your assets, know exactly what they are inheriting and who their parents have entrusted with these assets.

Following are some reasons I stress the importance of reviewing designations together:

  • If your beneficiary information is not current, in the event of your untimely passing your assets could be distributed to an unintended heir. This may be true even if you have an up-to-date will, as beneficiary designations often trump all other legal documents.
  • Having proper designations in place may extend tax-related benefits and reduce the tax burden for your beneficiaries.
  • Taking a small amount of time to update and verify your designations will ensure that your wishes are met, and will prevent your beneficiaries from bearing added stress due to legal complications.

It’s really as simple as picking up the phone to get started. If you are not 100% certain that your beneficiary designations are current, please call me today and I will work with you to take care of this most important matter.

The last thing you want is for your loved ones to be stuck with a mountain of paperwork and confusion when they are trying to settle your estate.

Ready to schedule a beneficiary review? 

Contact me!

Disclosure:

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Securities offered through LPL Financial, member FINRA/SIPC.

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