The Importance of Beneficiary Designations
A beneficiary designation on an investment account, bank account, IRA, life insurance policy, or any other asset determines who will receive the asset on the owner’s death, regardless of directions in their last will and testament. The assets pass directly to the designated beneficiary and are not included in the owner’s estate, avoiding unnecessary delays caused by probate.
An Optimal Way to Pass Assets Directly to Heirs, Promoting Privacy and Efficiency
If the account owner neglects to update beneficiary designations, family members may face a painful surprise on the owner’s death. Ex-spouses, estranged children, or people no longer in close relationship with the account owner may inherit an unexpected (unintended) windfall. The family or current spouse will have little or no recourse. If they decide to pursue the asset through litigation, there’s no guarantee of a successful court outcome.
Do not designate a minor child as a direct beneficiary of an investment account, bank account, IRA, life insurance policy, or other asset. By law, a minor child may not inherit assets. As a result, a guardian or conservator may need to be appointed through probate to oversee the inheritance, until the minor child reaches legal adulthood. That is age 18 in most states.
If the institution permits naming a second and a third beneficiary, do so. If the primary beneficiary predeceases the account owner or cannot be located, the secondary beneficiary will receive the assets rather than having the account included in the probate estate.
Update Beneficiary Designations Regularly
A complete list of accounts should be created to identify which accounts have beneficiary designations. Review the designations as each account is added to the list. If the information is maintained on a personal computer, the list should be encrypted. A hard copy should be kept in a fire and waterproof safe at home. A trusted person or an advisor should be told the location of the list and any passwords to access it.
This information should never be included in a last will and testament. Why? Last wills become public documents during the probate process. Consequently, account numbers, account titles, etc., need to be treated as protected information.
In addition to compiling a list with the company contact information, account name, number, and the names of the primary and secondary beneficiaries, it will be helpful for designated beneficiaries to have company contact information and, if available, any forms used by the institution to claim their inheritance.
Providing Information for Executors
For those who prefer not to provide heirs with detailed information, an alternative is to provide it to an executor. While the accounts are outside of your probate estate, the executor will be able to notify beneficiaries and give them the information needed to obtain their inheritance.
Completing the Estate Plan
Failing to update beneficiary designations is like failing to fund trusts by retitling assets. Changes cannot be made after the account owner’s death, so both of these tasks must be completed in advance to achieve the goals of the estate plan.
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