Updating your beneficiary information may not seem like an important thing to do, so it often goes unnoticed. However, despite being a simple task, it’s actually a vital element of your estate plan and larger retirement plan. Outdated beneficiary designations can completely change what happens to your assets when you pass.
And the effects are often more than just financial, leaving lasting emotional implications for your family members and loved ones. Let’s discuss the importance of updating beneficiary designations and the common major life changes that can be cause for revisions. You might be surprised just how many significant changes can occur within three to five years!
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What’s A Beneficiary?
First, some background. A beneficiary is any individual or entity (such as a charity or trust) to whom you leave your investments or real estate property.
Most retirement accounts and financial products like an IRA, 401k, or life insurance policy provide a space for naming beneficiaries directly on the account paperwork. Beneficiaries listed in these official designations are called “named beneficiaries.” When designated, new assets within an account will pass directly to the named beneficiaries when you pass away.
In some financial situations, you may have accounts that don’t include named beneficiaries, like a bank or taxable brokerage account. In this instance, payable on death (POD) and transfer on death (TOD) account titling can serve the same purpose.
If you aren’t sure what applies to each of your accounts, speak with your financial advisor and estate planning attorney.
As an added protection, consider naming both primary and contingent beneficiaries for all your accounts.
Primary beneficiaries are the first in line. You can have one or more. For example, you may have two, with each getting 50%. As long as a named primary beneficiary is alive when you pass, the percentage allotted to them is transferred.
Contingent beneficiaries are second in line behind primary beneficiaries. In the unfortunate event that a primary beneficiary predeceases you, a contingent beneficiary may fill the gap.
Why Are Updated Beneficiaries So Important?
A significant benefit of naming beneficiaries is that official beneficiary designations allow the account to avoid probate—the public process for verifying and assigning assets from the estate to ensure it settles correctly.
As with any court process, it can be lengthy and often cumbersome. Passing assets outside of that process can save your family significant time, frustration, expense, and publicity.
Leaving less for an executor to manage, also makes the rest of the estate planning process more streamlined.
Perhaps more importantly than their simplicity, beneficiary designations also supersede what’s written in your will. If there’s a conflict between the two documents, your beneficiary designation stands. This could create problems if you don’t keep them up to date.
Let’s take a look at this common reason for updating your beneficiaries.
Suppose you started working for a company years ago shortly after you were newly married. You opened a 401k through your employer and named your spouse the 100% beneficiary. Years later, you’ve since divorced your now ex-spouse and updated your last will and testament to remove them.
If you don’t also update your 401k beneficiary designation, your former spouse will still get 100% of it if you pass. Even if you have a new spouse!
These sorts of life changes can create traumatic situations more often than you’d like to think. Not only will it leave a surviving spouse in a rough financial position, but imagine how emotionally fraught that situation becomes.
When Should You Update Your Beneficiaries?
As a rule, your beneficiary designations should change with major life events that alter your family dynamic. You won’t always think about needed beneficiary changes when things happen, so taking the time to review every few years is essential to ensure you aren’t missing anything.
Which major life events often lead to a need to update account documents? Think about anything that changes the composition of your family.
Common examples are marriage and divorce (your own or your children’s), death, and birth—but keep in mind minors can’t inherit property. It may be better to leave assets to a revocable living trust (as an example) for the benefit of a minor rather than naming the minor directly.
Job changes, moving to a new state or home, a change in your health or the value of your estate can sometimes necessitate changes as well.
Remember, your estate plan should reflect your goals and values. During your periodic revisions, ensure your documents align with your vision and legacy plan, regardless of your family makeup or any changes that have occurred.
Keep An Eye On Your Estate Plan
Beneficiary designations are only one component of your estate plan, and your estate plan is only one element of your broad financial plan. This isn’t to say beneficiary designations or your estate plan or unimportant, but that they fit within a larger context, and it’s necessary to keep your eye on the bigger picture.
Your needs may change and updating one element likely means that other areas also need attention. This is where your financial advisor and estate planning attorney can step in to help you.
At Covenant Wealth Advisors we pride ourselves on developing strong client relationships. We can help you create an estate plan that suits you and your loved ones. We have worked with many families to make sure their estate planning documents accurately reflected their desired outcomes and supported their larger financial plan. We’d love to discuss how we can help you, too. Set up some time to speak with an advisor today.
Your estate plan is just one aspect of your larger retirement plan. What other things should you be aware of? Check them out by downloading our free retirement planning checklists to be sure you remain on track.
Broderick Mullins, MBA
Broderick is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors serving clients across the United States. He specializes in helping individuals aged 50 plus create, implement, and protect a personalized financial plan for retirement.
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