In today's fast-paced world, it's easy to lose track of who your designated account beneficiaries are. Circumstances may change from when you originally set up an account, but you might not always remember to update your beneficiaries.
Outdated information can thwart your estate planning goals. For instance, if you're newly married and die before updating your account beneficiaries, your parents might wind up inheriting certain assets, instead of your spouse. To avoid such mishaps, you should get in the habit of reviewing your designated beneficiaries each year — as well as consider making changes any time you experience a major life-event (such as a change in marital status or the birth or adoption of a child).
When you die, so-called "nonprobate assets" are transferred to family members through beneficiary designations. Nonprobate assets can include:
Nonprobate assets bypass more traditional estate planning vehicles, such as wills or revocable trusts.
Here are some tips to follow when reviewing your beneficiary designations:
Name a primary beneficiary and at least one contingent beneficiary. Without a contingent beneficiary for an asset, if the primary beneficiary dies before you — and you don't designate another beneficiary before you die — the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets offer some protection against your creditors, which would be lost if they were transferred to your estate. To ensure that you control the ultimate disposition of your wealth and protect that wealth from creditors, name both primary and contingent beneficiaries and avoid naming your estate as a beneficiary.
Update beneficiaries to reflect changing circumstances. Designating a beneficiary isn't a "set it and forget it" activity. Failure to update beneficiary designations to reflect changing circumstances creates a risk that you will inadvertently leave assets to someone you didn't intend to benefit, such as an ex-spouse.
It's also important to update your designation if the primary beneficiary dies, especially if there's no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, that you name your spouse as primary beneficiary of a life insurance policy and name your minor child as contingent beneficiary. If your spouse dies while your child is still a minor, it may be advisable to name a new primary beneficiary — such as a trust — to avoid the complications associated with leaving assets to a minor (court-appointed guardianship, etc.). Note that there are a lot of nuances to consider when deciding to name a trust as a beneficiary.
Consider the impact on government benefits. If a loved one — for example, a disabled child — depends on Medicaid or other government benefits, naming that person as primary beneficiary of a retirement account or other asset may render him or her ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as beneficiary.
Keep an eye on tax developments. Changing tax laws can easily derail your estate plan if you fail to update your plan accordingly.
Life may occasionally throw you curveballs, so effective estate planning requires your ongoing attention. Routinely updating beneficiaries is one way to stay on top of your game. But you also need to consider whether your current beneficiaries align with your overall estate planning goals. Your goals may evolve as circumstances change. Contact your tax or financial advisor to determine if you need to make any changes to your existing estate plan, including your designated account beneficiaries.
Get in touch today and find out how we can help you meet your objectives.
