Should I Name Beneficiaries?

YES!  The process of grieving the loss of a loved one is bad enough without complicating the lives of those left behind. By taking the relatively simple and routine step of naming or designating beneficiaries it is possible to direct the disposition or transfer of many of your assets quickly in a way that avoids probate, which is a court-supervised legal process of distributing assets upon a death. Beneficiary designations also override any instructions included in your will.  How long probate takes varies by where you live and how complex the estate is, but in the case of a typical estate one could expect probate to take 6-12 months. When beneficiaries are designated, the asset transfer becomes much faster and simpler for heirs – often just the provision of a death certificate is needed to get the process well along its way – our loved ones can access the assets or monies almost immediately without the need of an attorney or court.

In this context, a beneficiary is defined “as a person, entity or organization designated to receive money, property or other benefits from someone else.”  A beneficiary can be a person (spouse, children, other family members or friends), a trust or an organization (charities and nonprofits). A primary beneficiary is the person (or persons) first in line to receive a distributed asset or benefit upon a death.  A contingent (or secondary) beneficiary receives the benefit if primary beneficiaries are deceased. Though there are some exceptions, for the most part, almost any person can be named as a beneficiary. If multiple beneficiaries are named, the distribution can be (1) equal, (2) by percentage or (3) per stirpes in which the inheritance passes to descendants if a beneficiary dies first.

What types of financial accounts or products can have designated beneficiaries? Retirement (401k, 403b, Traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs) and brokerage accounts (taxable) are the two biggest categories.  Over the years, it is our experience that the transfer of assets to designated heirs has taken just a few weeks, instead of the many months seen in probate. Bank accounts (checking, saving and CD accounts) can have a Payable on Death (POD) or Transfer on Death (TOD) designation that works in the same way as naming beneficiaries for retirement and brokerage accounts. When we purchase life insurance it is often with the intent of providing a benefit, after our death, for a specific person or persons, thus beneficiary designations are typically written into the policy.

Life Changes. The only mistake you can make in designating beneficiaries is not updating your beneficiaries as your life or that of your family and friends changes around you. It is very important to review and update your beneficiary designations after these key life events: marriage or remarriage, divorce, birth or adoption of a child, death of a current beneficiary or a significant change in financial circumstances or relationships. Of these life events, it is divorce that presents the most unclear picture when it comes to beneficiary designations. While many states automatically revoke an ex-spouse as beneficiary after divorce, it varies widely based on state law, account type and whether the designation was updated after the divorce. In the case of retirement accounts, it is possible for an ex-spouse to receive a death benefit if the plan beneficiary form was never changed. If you would like to keep the designation of an ex-spouse then the beneficiary plan would need to be redesignated with the updated relationship (from “spouse” to “ex-spouse”).