Assigning and updating beneficiary designations for your retirement plans, life insurance policies, and annuities are tasks that notoriously get ignored. While the process itself is usually pretty straightforward — putting someone’s name on a form — the consequences of your choice can be fairly substantial. Don’t wait any longer!
Who to choose as beneficiaries
You can name any of the usual suspects as a beneficiary — your spouse, children, or other relatives. You can also name friends, trusts, charities, and even various institutions like colleges, universities, libraries, and so forth.
There are some cases, however, in which it’s best to take the additional step of setting up a trust.
- You should not name underage children or individuals with special needs as direct beneficiaries. People who fall into these categories will most likely need guidance from a more experienced individual who can help them make financially sound decisions.In addition, if they are direct beneficiaries, individuals with special needs who are receiving a government benefit such as Supplemental Security Income (SSI), risk losing that benefit if their inheritance makes them financially ineligible. You may want to look into a special needs trust.
- In the case of young children without the requisite experience handling money, simply assigning a trustee and designating an age at which the beneficiary gains rights over the assets is not always sufficient. In case after case, it has been shown that when someone who has only just achieved status as an adult (at somewhere between 18 and 21 years of age) is given a large sum of money, it usually ends badly. A better solution might be to set up some kind of lifetime trust that will help protect the assets while still making a portion of them available the heir.
- In a similar vein, loved ones who have proven that they consistently make irresponsible financial decisions should also not be named as direct beneficiaries, and should be designated only under terms similar to those described for an inexperienced child. Read more about that here….
Finally, it’s important to assign secondary or contingent beneficiaries in case your primary beneficiary dies before you do, or you die together. In such cases, if you failed to designate secondary beneficiaries, distribution of your assets will be handled as though you had not named a beneficiary at all.
Keep your beneficiary designations up to date
Designating beneficiaries is not a once-and-done task. Life events such as marriage, divorce, birth, and death can change your estate plans. It’s important to review your beneficiary designations each year to ensure that they reflect your most current wishes.
Beneficiary designations typically become active immediately after death, and they override any instructions that may be in a Will regarding the distribution of assets. For this reason, it’s very important to keep your various beneficiary designations up to date. You would not want, for instance, for a retirement account or life insurance policy to be distributed to an ex spouse.
Consider tax liabilities
There are also, as is usually the case, several tax issues to consider. While individuals are typically able to inherit from their spouses without having to worry about estate taxes or forced payouts, other heirs may need to be protected from such situations.
To avoid unintentionally putting undue financial burdens on your beneficiaries, it’s a good idea to talk with them about your plans so that you can discuss any potential liabilities and how to avoid them.
Designating beneficiaries for important assets are not a difficult task, but it is one for which due diligence and careful consideration are warranted. To ensure you’ve covered all the bases, give us a call.
It’s worth it to take the time to get everything properly structured so that you and your heirs don’t have to deal with negative consequences later on.