If you’ve ever opened a retirement account, chances are you were required to name a set of beneficiaries. You may not remember who you named and/or know exactly what doing so entails, but unless you left the field blank (a rare occurrence nowadays), it’s likely that one of your loved ones is set to inherit your assets after you pass away.

As you might imagine, naming your beneficiaries is a big responsibility; but most of us don’t think to review and update this on our policies as often we should. Read on to learn more about the importance of keeping your beneficiary list as up-to-date as possible and how to avoid making a costly mistake with your major retirement assets.

What is a beneficiary?

A beneficiary is an individual or entity named as the inheritor of your assets on financial products such as retirement accounts (e.g., 401(k)s and IRAs), bank and brokerage accounts, and life insurance policies: often an individual’s spouse, children, parents, friends, or other loved ones (or even charities, in some cases). You can also name your own estate as a beneficiary, thus dividing your assets per your wishes in your trust or will.

There are two types of beneficiaries: primary and contingent. The former is the first person/people who will receive your assets, while the latter is the person/people who will receive your assets only if the primary beneficiary is deceased or otherwise unavailable to receive the funds. You can name multiple primary beneficiaries and also apportion the asset according to how much you want each party to receive.

What’s the purpose of naming beneficiaries?

As an important estate planning tool for simplifying the settling of your assets—including your retirement accounts—naming your retirement account beneficiaries ensures your assets will go to the right people upon your death.

If you’ve named beneficiaries on your retirement accounts, your heirs can also potentially bypass probate (the legal process used to administer a person’s estate after his or her death, including verifying his/her will is valid and authentic): meaning they’ll receive their inheritance much quicker.

Why should I update my beneficiaries?

Unfortunately, your life insurance and retirement plan beneficiaries don’t automatically update—even in the case of major life events that entail legal documentation such as divorce, marriage, death, or birth.

Consequently, individuals listed on your policies (e.g., ex-spouses or friends and family) may have since passed away. Furthermore, you may accidentally exclude important loved ones—such as children born after you initially established beneficiaries on these accounts—meaning retirement assets may not be split based on your true desires. Worse yet, these individuals who may feel like they were shortchanged could seek to contest your beneficiary designations in court: delaying the distribution of your assets and potentially dividing your family.

With that said, it’s best to review your beneficiaries every few years or after any major life event such as marriage, divorce, births, deaths, severe injury, or anything similar that might change your prioritized list of inheritors.

I updated my will. Do I still need to update my beneficiaries?

While you’re off to a great start by even having a will in the first place (most adults in fact don’t), you still need to ensure your beneficiaries are up-to-date: as the beneficiaries listed on your retirement accounts or insurance policies generally supersede your will. In other words, regardless of what your will says, those assets will pass onto the listed beneficiaries on those accounts (unless you list your estate as your primary beneficiary).

Other considerations when updating beneficiaries

If you’re married, it’s perhaps worthwhile to check your state’s rules and regulations regarding whom you must name as a beneficiary as community or marital property states require your spouse be listed as a primary beneficiary (and may even require he/she receives a minimum percentage before you list others). Furthermore, you also may need the written consent of your spouse if you name anyone instead of—or in addition to—him/her as a beneficiary. Community states include Arizona, California, Idaho, Louisiana, Nevada. New Mexico, Texas, Washington, and Wisconsin.

Regardless of where you live, for qualified plans—such as a 401(k), 403(b), or pension plan—federal regulations will automatically designate the spouse of the account owner as a primary beneficiary unless the owner approves otherwise in writing.

If you decide to bequest your retirement assets to a minor, be sure to name a guardian since minors cannot inherit assets as direct beneficiaries; otherwise, the court will appoint one for you (perhaps someone you would not have otherwise selected). An even better idea is to set up a trust (another method used to transfer assets after you pass away) and appoint a trustee (a person or entity) to manage it. In this scenario, a trust provides additional flexibility as you can spell out specific requirements that must be met for your children to receive their money (e.g., the age at which they can receive portions of their inheritance or an event dictating the same, such as college graduation).

Similarly, you should avoid naming beneficiaries who are disabled and dependent on government assistance as this can potentially delay or even disqualify them from receiving these benefits; you can instead create a special needs trust so a trustee can cover expenses not covered by the government.

Need help managing your assets? We’ve got you covered.

Planning for retirement (and beyond) is often a difficult process when you choose to do so all on your own. You may lack the legal knowledge or the time to sit down and determine where your money is going and when. You may not even know what you need to take care of in order to ensure a smooth, stress-free retirement!

Fortunately, our Vision Retirement team is well-versed in helping people manage their assets and documents as they transition from one stage of life to another. We can help you with the same while also offering guidance on crucial steps you or your loved ones need to take. Contact us today to embark on your journey.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.