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5 Things You Need to Know Before You Name Beneficiaries

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Portrait of young family with dog smiling and relaxing on the beach front.

What to Consider Before Naming Beneficiaries

Once you have chosen the people you want to receive any of your assets — either from a will, a trust, a life insurance policy or a retirement or bank account — the way you designate how they will inherit should be a key consideration.

Here are five things you need to know before you name your beneficiaries:

  1. Beneficiaries of a will have to wait. Any assets you bequeath to a beneficiary via a traditional will have to wait for their money or property until the probate process has been completed. In some cases, this can take many months or even years — and if the estate is complex, the legal fees can deplete that inheritance. If you want to make it easier for your beneficiaries, consider creating a Revocable Living Trust as part of your estate plan. A trust does not go through probate; upon your death, the successor trustee distributes the assets to your beneficiaries.
  2. Retirement plan and life insurance policy benefits are paid directly. The assets in a life insurance policy or retirement plan are not subject to probate and pass to your beneficiaries directly. Your beneficiaries will receive these assets after providing the account owner’s proof of death and a proof of identity for the beneficiary. Naming contingent beneficiaries is important; if the primary beneficiary predeceases you, the assets will likely go into your estate and will be subject to taxes.
  3. Minor children should not inherit directly. Naming a minor child as the beneficiary of a life insurance policy or other assets is never recommended. If you fail to name a guardian, the state could take over the assets and name someone to manage those assets on the child’s behalf. This can result in additional expenses that would eat into that inheritance, and those assets may not be managed according to your wishes. Instead, the wise move is to create a trust to hold these assets for the benefit of a minor child and name a successor trustee to oversee the management and distribution of the funds in a way that complies with your wishes.
  4. Give careful consideration to naming retirement plan beneficiaries. Studies have shown that most beneficiaries of a retirement plan take the cash immediately, which may not be your intention. Naming your estate as the beneficiary of a retirement plan is also not recommended since doing so would not allow your spouse or younger beneficiary to take advantage of an IRA rollover or the “stretch” IRA option that could allow your IRA to grow tax-deferred over many years.
  5. If there are multiple beneficiaries, name them. If there are multiple beneficiaries for an insurance policy or retirement plan, don’t make the mistake of just naming one person — say, the oldest child — and assuming they will make the proper distributions.   Instead, designate a separate share for each beneficiary. If one of your beneficiaries has special needs, create a trust for their share so any inherited assets don’t disqualify them from important government benefits.

One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about a Family Wealth Planning Session, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security.

 

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