To Operate More Accounts Than Anticipated, You Require Designated Beneficiaries
Most individuals are aware that if you have a life insurance policy, you need to assign a beneficiary - the person or entity that collects the payout. Typically, that's as far as our involvement with the concept goes, due to a lack of substantial wealth and the assumption that our spouse or family will automatically inherit everything.
However, assigning beneficiaries is not limited to life insurance. Designating beneficiaries for your assets and estate brings numerous benefits, and if you haven't updated them recently, it's crucial to do so sooner rather than later.
Advantages of Assigning Beneficiaries
You might think that upon your demise, your property and assets would pass automatically to your spouse, children, or closest relatives (like a sibling). Nevertheless, that's not always the case. Dying without a will or designated beneficiaries (called "intestate succession") can trigger a lengthy and frustrating probate process governed by state laws. This process can take years to complete, causing emotional and financial stress for your loved ones.
Even if you have a last will and testament, it's advisable to appoint beneficiaries for your assets, as beneficiaries supersede your will. For instance, if your will states that your asset goes to your spouse, yet you listed your sibling as the beneficiary, your sibling would inherit the asset. In essence, designating beneficiaries allows you to control the distribution of your assets after your departure, alleviating your loved ones from unnecessary grief.
The majority of your financial assets should have an up-to-date beneficiary, including:
- Life insurance: This is usually the most apparent case for most of us. If you receive life insurance benefits from your job, make sure you've appointed a beneficiary.
- Bank accounts: Your checking and savings accounts can have beneficiaries, and naming one can accelerate and simplify the process of accessing them after your demise.
- Investment & retirement accounts: This consists of health savings accounts (HSAs), and 529 accounts.
- Annuities: Naming a beneficiary for any annuities you've purchased can significantly simplify the process of transferring the annuity to another person.
When selecting your beneficiaries, consider the following:
- Keeping them updated: If you haven't reviewed your designated beneficiaries recently, it's essential to conduct an audit and update them to reflect your present relationships and desires (e.g., an ex-spouse still listed as your life insurance beneficiary).
- Contingent beneficiaries: Make sure that each asset has a contingent beneficiary (a "backup") named - a person who would inherit in case your primary beneficiary predeceases you.
How to Pick Your Beneficiaries
Once you realize the necessity of appointing beneficiaries for all your accounts, the challenge becomes choosing the right person. Although this might seem self-explanatory, there are a few key factors to consider:
- Age: Minors cannot directly inherit nose, so naming a child as a beneficiary adds complexity instead of simplifying the process. Most life insurance policies and financial accounts won't allow this, and if you manage to do so, the asset might end up in a trust administered by the state government until the beneficiary turns 18.
- Capability: When selecting beneficiaries, consider their abilities. If they will manage a significant financial asset, ask yourself if they possess the necessary experience and knowledge to handle it moving forward.
- Circumstances: While designating someone to receive a financial windfall might seem like an obvious good idea - beneficiaries benefit, after all, - pause for a moment to contemplate the potential negative impact of a sudden increase in net worth on someone in terms of tax liability or qualifying for benefits.
- Clarity: Although most financial accounts require a specific name for beneficiaries, if you have the option of being less specific (e.g., naming "all my children" as beneficiaries), avoid it. Designating multiple beneficiaries who predecease you, for example, can complicate matters.
- Insurable interest: Many life insurance policies require that your beneficiary have an "insurable interest" in you - they must financially depend on you. Designating a beneficiary who doesn't meet this requirement may result in numerous complications, so ensure your desired beneficiary will meet your insurer's criteria.
Lastly, bear in mind that, in many cases, you can appoint a charitable organization as a beneficiary. Since beneficiary designations supersede wills, this is a simple method to control who benefits from your estate after your demise.
In addition to naming a beneficiary for your life insurance policy, it's equally important to designate beneficiaries for your bank accounts. By doing so, the process of accessing these accounts after your demise can be accelerated and simplified.
Furthermore, updating your beneficiaries for your investment and retirement accounts, such as health savings accounts (HSAs) and 529 accounts, ensures that these assets are distributed according to your wishes after your demise, alleviating your loved ones from unnecessary grief.
