A beneficiary is a person or entity you designate to receive the benefits of a particular account or policy after your death. Designating, reviewing and updating beneficiaries are basic tasks of estate planning. Failing to name a beneficiary or naming the wrong beneficiary can create complications, add costs and increase the delay in settling your estate. Generally, almost any person or entity can be named as a beneficiary, although restrictions can limit your flexibility in naming beneficiaries in certain circumstances. A financial advisor can guide you through the process of setting up beneficiaries for all applicable accounts.
Any time you set up a new bank, brokerage or retirement account, as part of the process you will be asked to designate one or more beneficiaries. A beneficiary is someone whom you want to receive the benefits or assets in the event of your death. Life insurance policies also have beneficiaries. These are the persons who will get checks from the insurance company to pay the death benefit. You also will name beneficiaries for annuities and trusts.
Selecting and designating as well as reviewing and updating beneficiaries is central to estate planning. It’s also important in retirement planning. Beneficiaries can extend the tax advantages of retirement accounts by inheriting and stretching distributions over their lifetimes.
Almost any person or legal entity can be named as a beneficiary. Spouses, children and friends are common beneficiaries. Charities, trusts and businesses may also be beneficiaries.
Some limitations may apply, however. For instance, in the case of individual retirement accounts, your spouse has to be named the primary beneficiary unless they legally waive this right. Also, minors may not be named as beneficiaries if they are not legally capable of managing assets.
How to Name Beneficiaries
Naming a beneficiary is generally a simple matter. The forms for the account or policy will ask you to provide the person’s full legal name and relationship to you, such as spouse, child or parent.
Sometimes you will be asked to provide additional details such as a mailing address, phone number, email address, date of birth, information like mailing address, phone number, email address or Social Security number. Provide clear, complete and accurate beneficiary information to avoid potential problems later on.
Importance of Naming Beneficiaries
It can be tempting to delay or skip naming a beneficiary when opening an account and it is wise to take time to carefully consider before you select someone as a beneficiary. When you name someone as a beneficiary in the paperwork for an account, that generally will overrule other instructions you might leave.
For instance, say your will leaves an account to your child but the beneficiary form names your ex-spouse. That generally means it will go to your ex-spouse whether that’s what you wanted or not. This is why it’s important to review and update beneficiary forms every two or three years and after major life events such as divorce, marriage, births and the like.
Leaving a beneficiary form blank can also cause problems. If you die and leave an account with no beneficiary, the account may have to go through probate, which can involve costs that reduce the value of the account and also add significant delay. In addition, in the absence of a named beneficiary, state inheritance law may direct that the asset goes to someone else entirely. For example, you may wish an account to go to a child from a previous marriage while state law requires that it go to your current spouse.
If you do name a beneficiary, on the other hand, the asset will be transferred to their ownership automatically and with a minimum of fuss compared to the typically lengthy and formal probate process. Naming a beneficiary is a simple, easy way to ensure that your wishes are followed after your death.
In addition to naming a primary or sole beneficiary, you are likely to be asked to name one or more contingent beneficiaries. These backup beneficiaries will come into play in the event the primary beneficiary dies first, can’t be located or is unable or unwilling to accept the benefits.
Sometimes a beneficiary will, in fact, refuse. Generally speaking, being named a beneficiary is a positive. However, the role comes with responsibility and potential tax implications. For example, if you inherit a retirement account, you may need to take mandatory distributions and pay taxes on those funds.
In addition to naming primary and backup beneficiaries, you can name multiple beneficiaries. In this case, you can provide a specific percentage of the account that will go to each of them.
Beneficiaries play a vital role in estate planning, helping to ensure a smooth transfer of assets. In insurance policies, beneficiaries receive policy payouts, helping to financially protect loved ones. In retirement planning, beneficiaries can extend the tax advantages of retirement accounts by inheriting and stretching distributions over their lifetimes. Naming beneficiaries can help ensure that your wishes are carried out after your death with a minimum of cost, delay and uncertainty.
Tips for Retirement
- You may want to discuss with a financial advisor the implications of naming someone as a beneficiary and how beneficiary designations are part of your overall estate plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s Retirement Calculator to see how you’re progressing toward your financial goals and how much you may need to increase savings to get where you want to go.
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