The Importance of Establishing and Reviewing Beneficiary Designations
While the thought of passing away is very uncomfortable, it is an inevitable part of life. Taking a few simple steps today to properly outline your wishes is critical to your financial plan, including legacy planning. This discussion will focus on the importance of maintaining up to date beneficiary designations as a ‘first line of defense’. Given that you are often busy flying and with life in general, this is one aspect of a holistic financial plan that often gets overlooked.
Why are beneficiary designations so important?
You may have heard the term ‘probate’, and that you should avoid it where possible. Essentially, probate is the process in which your executor settles your estate, during which time your estate is subject to creditors and legal disputes that could potentially take years! Additionally, while you may have already established a will that is in line with your intentions, did you know that beneficiaries designated on your accounts actually supersede instructions in your will? Once established, all beneficiary designations should be reviewed annually or upon major life changes to avoid some potentially disastrous consequences. For example, in the event of a divorce/remarriage an ex-spouse may still be listed as a designated beneficiary. Even with an updated will, the specific accounts would pass to the listed account beneficiary!
How do I get started?
There are certain account types with an ownership structure designed to automatically pass assets to the surviving owner (for example accounts listed joint tenants with right of survivorship or JTWROS). These account types essentially have a ‘built in’ beneficiary. Retirement accounts and life insurance policies allow you to designate specific individuals or entities as beneficiaries. Accounts without established beneficiaries may default to your estate (which would be subject to probate), depending on the institution. When it comes to banking or taxable brokerage accounts, the beneficiary designation is called a “Transfer-on-Death” designation.
As a best practice, start by ensuring all life insurance policies, retirement accounts, taxable brokerage accounts and bank accounts currently have established beneficiaries in accordance with your wishes. Set an annual reminder (like your birthday) to review all of them and update as needed. Revisit them upon any major life changes as well (death of a loved one, divorce, marriage, new children/grandchildren, etc). Usually, your beneficiary designations can be established and updated quickly online. Some institutions may require a form, so be sure to check with the provider if it is unclear. Taking this step today can prevent unintended and possible costly complications down the road!
“Always plan ahead. It wasn’t raining when Noah built the ark.”– Richard Cushing
Total Investment Management, Inc. offers this commentary strictly to educate, inform and share our thoughts on the markets. Nothing here should be construed as investment advice. Past performance is no guarantee of future results.