Shakespearian references aside, a whole lot lies in a name when that name belongs to the beneficiary of your assets. If you’re like most people, though, you probably haven’t thought of those beneficiary names since you first wrote them down on paperwork related to your:
- Investment accounts
- Bank accounts
- Insurance policies
- Retirement accounts
- Trusts
- Employer-sponsored plans
In fact, there’s a slim chance that you are scratching your head and wondering, “What is a beneficiary anyway?” You’re not alone there either. Often, we designate a beneficiary without really knowing what that means and how it could impact our estate plan. Fortunately, a little information is all you need to get moving.
What is a beneficiary?
Put simply, a beneficiary is the answer to the question, “Who gets what from my estate?” Sometimes, the same person may be the “who” for all of your assets. In many cases, however, the beneficiary may vary based on what the asset is and what you are trying to accomplish.
As your life changes, your beneficiaries may change as well. Milestone events that may impact your personal estate plan and beneficiary designations include:
- Changing jobs
- Changing marital status
- Starting a family
- Losing a loved one
You also should have a contingent beneficiary, or backup, for your primary beneficiary.
Beneficiaries and your estate plan
Many people think that they can simply name their estate as the primary beneficiary of their assets and then things will be doled out based on a family structure or other method. The downside in this plan is that wealth intended to go to your loved ones may become subject to probate, resulting in needless delays, expenses, and sometimes public scrutiny. In addition, creditors may gain access to your money.
On the other hand, some assets need to be available for your executor to pay expenses and taxes, as well as to maximize your estate tax deductions, if necessary. The beneficiary of a qualified plan, IRA, annuity, or life insurance is rarely your estate, due to unfavorable tax consequences.
Failure to list a contingent beneficiary carries the risk that your primary beneficiary may predecease you. When this happens, the sum is paid to your estate. This, of course, has all of the previously mentioned problems associated with it. In addition, naming a contingent beneficiary provides postmortem estate planning opportunities that can correct mistakes not evident during your lifetime.
A word on titling of assets
Joint ownership is the most common way for spouses to hold property. It can also make it easier for a child to manage the property of an aging parent. But the convenience of joint ownership comes with trade-offs:
- Assets held jointly that revert to the surviving owner no longer have any legal connectionto the deceased owner’s interests.
- The joint owner can give the property to anyone he or she wants, or it can be attached by the joint owner’s creditors, including an ex-spouse.
- This loss of control can cause problems if a spouse remarries, or if there are children from a previous marriage.
- If you have an estate over $4 million, joint ownership can make it difficult to take advantage of your allowable deductions.*
That’s why it is wise to consider the titling of your assets as you review beneficiaries. You may ultimately need to change how your joint assets are owned to ensure that each spouse’s wishes are carried out.
What you can do to resolve issues
You may want to conduct an informal review of your beneficiaries on your own so you can identify quick fixes, such as naming beneficiaries—both primary and contingent—where you haven’t listed any. If you do have assets where your estate is named as the beneficiary, it is imperative that you know the full implications of this designation and that you’ve done this only where it benefits the estate plan.
For guidance on this topic, consult your financial advisor and your legal advisor. When you conduct a review with a professional, you should also review your will because the allocation of assets in your will does not override the beneficiaries that you’ve assigned to specific accounts, such as investment and retirement accounts and insurance policies.
Be sure to review your beneficiaries every few years, or whenever your life changes significantly. This will ensure that you never have to ponder “What’s in a name?” when it comes to your assets.
* If you are currently married and live in a community property state (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), consult your legal advisor about the consequences of ownership or beneficiary changes.
