Designating Beneficiaries
Designating beneficiaries is a crucial step when managing financial products such as life insurance, retirement accounts, and annuities. This process involves naming individuals, trusts, charities, or organizations that will inherit the financial assets upon the holder's death. There are primary beneficiaries, who receive the assets first, and secondary or contingent beneficiaries, who are designated in case the primary beneficiaries are no longer alive. It's essential to keep the beneficiary designations updated, especially after significant life changes like marriage or divorce, to reflect one's current intentions.
Notably, a beneficiary designation overrides instructions in a will, which underscores the importance of choosing beneficiaries carefully. Leaving assets to minors or individuals with disabilities can complicate matters, potentially affecting government benefits or resulting in costly court appointments. Regular reviews of beneficiary designations, including clearly identifying them by name and social security number, can prevent disputes and ensure that one's wishes are honored. Ultimately, thoughtful beneficiary designations can provide peace of mind, ensuring that assets are distributed in a manner aligned with the holder's intentions and minimizing potential confusion for loved ones.
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Designating Beneficiaries
When a person buys life insurance, creates a retirement account, purchases an annuity, or obtains other financial products, the person is asked to designate beneficiaries. When the holder of the financial product passes away, the beneficiaries are the individuals, trusts, charities, or organizations that will receive the financial assets from said products. A beneficiary designation is the act of naming one or more people or organizations that will receive certain assets upon the death of the holder of the financial product. The primary beneficiary is the first person (it may be more than one person) to inherit the product when the holder passes away. When assigning multiple primary beneficiaries, the individual will determine what percentage of the assets each beneficiary will receive. Secondary (or contingent) beneficiaries are designated in case the primary beneficiary is dead or dies with the individual who has been designated. A person may change their designated beneficiaries to reflect a life change (divorce, marriage, etc.) or for any other reason. Careful thought and selection of beneficiaries can help minimize confusion, frustration, and anxiety among a deceased person's loved ones.
Background
A will is a legal document in which an individual specifies how their assets should be distributed upon their death. Some evidence indicates that wills were used in ancient Egypt. The beginning of modern wills is found in Roman law at which time the will was revocable (able to be changed). Wills were used in England, particularly among the upper class, dating back to before the eleventh century. These wills were the basis of the wills used in the present day.
It is important to designate a beneficiary even if a person already has a will, because a will does not override a designated beneficiary. In 2001, a man's wife of nearly twenty years died. Her retirement account (which was worth nearly one million dollars) was with the New York Teachers' Retirement System. She started the account prior to meeting her husband. The funds in the account were designated for her mother, uncle, and sister. The surviving sister claimed the money and refused to give anything to her sister's husband. While the husband sued, the courts ruled for the sister. The court found that a beneficiary designation form is binding, ruling that an individual's intention cannot be assumed.
One might consider not designating beneficiaries, figuring assets will be distributed according to their will. Not naming beneficiaries for non-retirement assets generally has few consequences, as the money typically becomes part of the estate and is handled in conjunction with the will. When an individual passes, their assets bypass the occasional lengthy and costly probate process and go straight to the beneficiaries. Concerning retirement assets, however, designating beneficiaries is important and beneficial as they are more complicated. Assets are distributed according to the administrator's plan document. Typically, the assets will go to the asset owner's spouse if they are married. If the owner is single, the assets will go to their estate. Not designating beneficiaries can lead to assets being distributed in a manner that goes against what the deceased planned or intended. Regarding an IRA (individual retirement account), the state can determine the recipient of the assets.
Overview
Experts suggest avoiding the designation of minors, individuals with disabilities, and estates, in certain instances, as beneficiaries. When leaving assets directly to minors, the court may appoint to look after the funds until the minor reaches a certain age (eighteen or twenty-one years old, for example). This process tends to be expensive and difficult to manage. In addition, many young people cannot manage the money properly when they receive it due to maturity issues.
Leaving money to someone with a disability can interfere with or even prevent the individual from getting government benefits and aid. Making an estate the designated beneficiary is problematic when it comes to retirement plans. The problem occurs because, within five years, the full amount must be distributed and taxed. An individual beneficiary can receive distributions over a lengthy period—decades even. This enables the beneficiary to avoid large tax costs. Generally, spouses may inherit assets from each other without producing estate taxes. With retirement accounts, spouses are not required to take taxable payouts. They also can combine the account with their own and defer distribution until they reach seventy and one-half, which means they would pay less in taxes.
Financial planners recommend regularly reviewing and designating beneficiary forms (generally once a year) to make any necessary changes and ensure the paperwork is in order and up to date. It is also recommended that secondary beneficiaries be named in case the primary beneficiary predeceases the holder. In addition, it allows the primary beneficiary the option to disclaim the benefit and have the funds go directly to the contingent beneficiary. Another suggestion is to clearly identify designated beneficiaries through name, relationship, and social security number. Ambiguous information is often discovered after the individual is deceased, leaving those left behind to speculate on the exact wishes of the individual.
Other tips include ensuring beneficiary designations are part of an estate plan. With assets invested in multiple financial institutions, an individual may inadvertently divide their assets in a way that is inconsistent with what they wanted the heirs to receive. Experts note that beneficiary designations could contradict each other and or a pension plan, etc., administered by an employer. If the individual is charitable, they can designate assets to go to a charity, and those funds will not be taxed.
Due to complex tax laws, deciding how to designate beneficiaries can be difficult. However, knowing that one's assets will go to the designated beneficiaries can be comforting. Therefore, designing beneficiaries in the most beneficial way to those left behind is a meaningful and essential task.
Bibliography
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Muldoon, Margaret. "5 Considerations When Selecting a Beneficiary." Penn Mutual, 26 May 2020, blog.pennmutual.com/5-considerations-when-selecting-a-beneficiary. Accessed 26 Dec. 2024.
Phipps, Melissa. "What's a Contingent Beneficiary?" The Balance, 12 Apr. 2022, www.thebalancemoney.com/what-is-a-contingent-beneficiary-2894272. Accessed 26 Dec. 2024.
"Retirement Planning." The Balance, www.thebalancemoney.com/retirement-planning-4073976. Accessed 26 Dec. 2024.
Rollison, William D. "History of Estate Planning." Notre Dame Law Review, vol. 37, no. 2, 1961, p. 160. Accessed 26 Dec. 2024.
Tuovila, Alicia. "Who Can Be a Designated Beneficiary?" Investopedia, 25 July 2024, www.investopedia.com/terms/d/designated-beneficiary.asp. Accessed 26 Dec. 2024.
"What is a Beneficiary Designation and Can It Be Contested?" Keystone Law Group, 27 Aug. 2024, keystone-law.com/what-is-a-beneficiary-designation-and-can-it-be-contested. Accessed 26 Dec. 2024.
"What Is a Will?" Fidelity, www.fidelity.com/life-events/estate-planning/will. Accessed 26 Dec. 2024.