Life’s twists and turns—whether they are major milestones or smaller, personal changes—often affect not only our day-to-day but also our financial future. A critical component of that future is making sure your financial assets are designated to the right people when you're no longer around. One of the most efficient ways to ensure that is by conducting a periodic beneficiary review.
This guide will walk you through what beneficiary designations are, why they matter, and how to conduct a review to protect your loved ones and estate.
What Are Beneficiaries?
Simply put, a beneficiary is someone designated to receive assets upon your death. This can include a wide range of financial products—such as life insurance policies, retirement accounts, or investment accounts. Your designated beneficiary can be a person, a group (like your children), or even an entity such as a charity.
Why a Beneficiary Review is Important
Regularly reviewing your beneficiaries is essential because life changes can create discrepancies between your financial wishes and what’s on record with your financial institutions. Major life events like marriage, divorce, births, and deaths could impact who you want to inherit your assets. If outdated beneficiary designations remain in place, your assets may not be distributed according to your current intentions, even if your will states otherwise.
Additionally, certain assets with designated beneficiaries pass outside of probate, which means they are transferred directly to your beneficiary without going through the court process. This makes it even more critical to get these designations right, as they can override any instructions in your will.
Steps to Conduct a Beneficiary Review
- Identify All Accounts with Beneficiary Designations
Start by compiling a list of accounts that allow you to name beneficiaries. Common accounts include:
- Life insurance policies
- Employer-sponsored retirement plans (like a 401(k))
- IRAs (traditional or Roth)
- Brokerage accounts with Transfer on Death (TOD) provisions
- Bank accounts with Payable on Death (POD) designations
- Annuities
- Pension plans
- Check and Update Your Designations
For each account, review the designated beneficiaries. Is the person or entity you named still in line with your wishes? Do you need to add contingent beneficiaries in case your primary beneficiary predeceases you? Ensure that your designations reflect your current life circumstances and future goals.
- Understand the Implications of Beneficiary Choices
When updating your beneficiaries, it’s crucial to understand how different choices might affect your estate. Some considerations include:
- Spousal rights: In many states, your spouse has certain rights to your retirement accounts, even if they aren’t named as a beneficiary. Be mindful of state laws when making updates.
- Minor children: Naming minor children as direct beneficiaries can complicate asset transfers, as a legal guardian will need to be appointed to manage their inheritance until they reach adulthood. Setting up a trust can help mitigate these issues.
- Tax implications: Designating beneficiaries for tax-deferred accounts like IRAs can have significant tax implications. Non-spouse beneficiaries may face different distribution rules, and a trusted advisor can help optimize this process.
- Keep Your Records Organized
Once you have made the necessary updates, be sure to keep your beneficiary forms in a safe, accessible place. Share your records with your estate planning attorney and your family so that they know where to find them in the event of your passing.
- Schedule Regular Reviews
It’s easy to forget about beneficiaries, especially for accounts you don’t access frequently. We recommend reviewing your designations every 2-3 years or after any major life event such as a birth, marriage, divorce, or death in the family.
Common Mistakes to Avoid
- Not Naming a Contingent Beneficiary
If your primary beneficiary predeceases you and no contingent beneficiary is named, the assets may be subject to probate.
- Failing to Update After Major Life Events
Divorce, marriage, and the birth of children should all trigger a review of your beneficiary designations. An ex-spouse could inadvertently remain a beneficiary if you don’t update your records.
- Ignoring Tax Implications
Make sure to understand the tax consequences of your beneficiary choices, especially for retirement accounts.
How a Professional Can Help
While a beneficiary review might seem simple, the stakes can be high. An estate planning professional or financial advisor can help you navigate complicated rules, optimize tax considerations, and ensure your beneficiary designations align with your overall financial goals. In fact, working with a fiduciary—a professional legally bound to put your interests first—can ensure you’re making the best choices for your legacy and your loved ones.
Conclusion
Reviewing your beneficiaries is a small but crucial step that can have profound effects on your estate. By making sure your designations are up-to-date and aligned with your intentions, you can ensure that your wealth is distributed efficiently, with minimal legal entanglements, and according to your wishes.
A well-executed beneficiary review isn’t just about avoiding mistakes—it’s about creating peace of mind for you and your loved ones. Regular reviews will keep your plans current and ensure that your financial legacy is well-managed long into the future.