Beneficiary designations are handy legal tools that guide the distribution of certain assets. They are commonly included on bank accounts, life insurance policies, annuities, and retirement assets like 401(k)s. This legal tool is generally present when the person who holds the account fills in the name of an individual or individuals, they wish to receive the account upon their death.
Accounts that transfer through beneficiary designations can make up a large portion of one’s estate. As such, their presence is an important part of any estate planning discussion. Three specific things to know and discuss during this portion of planning include the following.
#1: They are their own entities.
You can state how you would like these assets to transfer in your will, but in all likelihood that will not trump the individual or individuals named as the beneficiary designation.
A will is a legal tool that helps to guide the distribution of assets that pass through probate. Assets that include a beneficiary designation pass outside of probate. As such, the will generally has no impact on their distribution.
#2: They are efficient.
One of the primary benefits of beneficiary designations, as alluded to in the first point, is the fact that they pass outside of probate. The beneficiary generally does not need to go through court to get the asset. The financial institution that holds the asset will likely have protocol the beneficiary must follow to get the asset, such as presenting a copy of the death certificate, but overall the transfer process is extremely efficient.
#3: They require maintenance.
These designations do not automatically update. There could be a problem if, for example, the named beneficiary has already passed away. Another common problem: the named beneficiary is now the ex-spouse and the holder of the asset would not have wanted that individual to receive the benefits. The best way to deal with these issues is to proactively review the designations on a regular basis and update the named individuals as needed.
