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How to Assign a Beneficiary

June 09, 2021

There are simple tasks you can do to practice some basic estate planning endeavors which can have a huge impact on your loved ones. One of the easiest and most fundamental tasks you can complete is to check your beneficiaries on your life insurance policies, TOD investment accounts (Transfer of Death) and retirement plans. Checking on this once per year is a meaningful act for those who are set to receive the funds, and the people set to be beneficiaries are often in great need of the assets when you pass away.

It’s helpful to have a quick understanding of why having assets passing by beneficiary law is advantageous. If a life insurance policy or retirement plan has an unnamed beneficiary or if the beneficiary predeceases the insured or owner of the account, the funds flow into the estate and pass through probate. While the probate court can sometimes be a positive process for heirs of an estate to retitle assets and clear liens that may exist, it can also be a painful process for many. Probate court rulings are public affairs, and fees can be quite expensive, especially if a will is unclear or contested by a legatee; it’s even more expensive if there isn’t a will yet created! Having assets pass through beneficiary rules instead of probate rules can be a major relief for families. All that’s needed in most cases to access the assets is a certified death certificate. In a tumultuous time, making anything simple is a relief for your family.

Here are a few tips to make sure your beneficiaries receive the assets you’ve earmarked for them.

1. Review the primary beneficiaries for the accounts. Plans change, relationships change, and goals change as the years go by. Have you created a trust and not named the trust as a beneficiary of a life insurance policy? Is a past relationship named as primary beneficiary? If you purchased a life insurance policy, oftentimes the life insurance agent completes the paperwork, and did he or she correctly title the beneficiary roles? Did you establish a retirement plan prior to getting married? If so, make sure your spouse is the beneficiary. This may seem all too simple, but life throws us all a few curveballs, so simply checking to see if the choices you made in the past align with your goals today is worthwhile.

2. Understand the per stirpes provision, especially if there are multiple beneficiaries. Per stirpes is a fancy word for “by representation.” An example of this provision is this: say you have two adult children as equal primary beneficiaries, and each child has their own respective families. If something terrible happens and one of the children dies, then the surviving child becomes sole beneficiary of the insurance policies and retirement accounts. If the per stirpes provision is enabled, then the share of the benefits would be paid to the deceased child’s family as if that child were still alive. The per stirpes provision exists so people don’t accidentally disinherit branches of their families.

3. Establish a contingent beneficiary or beneficiaries. If a primary beneficiary predeceases the insured or account holder, the assets that once passed smoothly through beneficiary law now stand in line in probate court. Probate court can create some fees on these accounts, and more importantly, will redirect the accounts to individuals you did not choose. Adding contingent or even tertiary beneficiaries can alleviate some of the unknown circumstances of life – or death.

4. Introduce your beneficiaries to your advisory team. Your beneficiaries don’t necessarily have to use your advisory team as their own, but your beneficiaries might someday be communicating with your attorney, insurance agents, and financial planner, so introducing your heirs to your advisors might be a fruitful engagement. If your beneficiaries are meeting your advisory team for the first time when a large sum of money is involved, the relationship could be pressurized to the point making emotional decisions without professional support.

5. Beware of naming children as beneficiaries. The age of majority is different from state to state, so know where your state stands on what age your kids reach adulthood. If children are named as beneficiaries of life insurance policies or retirement plans, the courts will appoint an administrator to manage the accounts until they reach adulthood. This translates to more fees on these accounts and less control. Chances are, your kids may be in dire need of these funds, but they might be required to wait years to access any sort of meaningful amount. Don’t let the courts decide what’s best for you and your family when you can easily make your own decisions, which brings us to our next point.

6. Set up a trust and fund it. Establishing – and funding – a trust for your family might very well solve all the problems with transferring funds to your beneficiaries. Whether it be transferring funds from spouse to spouse, parents to children, or grandparents to grandchildren, establishing the right kind of trust that aligns with your financial goals might be the most meaningful and selfless act you can possibly do for your heirs. Establishing a trust is also the best way to transfer assets directly to kids. A trust can be the primary beneficiary for your life insurance and TOD accounts, but you might want to consult legal advice prior to naming a trust the primary beneficiary of a retirement account. If you are married, you might want to keep your spouse as primary beneficiary and name the trust as contingent beneficiary in your retirement accounts to take advantage of the rollover rules in these accounts. The importance of a qualified estate planning attorney is paramount in establishing a trust of any kind. Trusts can be complicated, and having a knowledgeable advisor helping you make decisions about arguably the most important moment of your lifetime is a professional relationship worth having.

Assigning beneficiaries in your life insurance policies, TOD (Transfer on Death) investment accounts, and retirement plans is a simple task that’s often overlooked; however, your beneficiaries, when they receive the funds, will cherish the legacy you created. Furthermore, you may be a beneficiary yourself someday, and if your parents or benefactors have completed the proper estate planning steps, your experience in their gifts and legacy will be positive and impactful. If they haven’t taken a few simple steps to make sure their affairs are organized, you could be in for a years-long conversation with the probate court.