Are Your Beneficiaries Up to Date?

Naming beneficiaries is an essential step in the estate planning process. What is a beneficiary, and what happens if you don't include them in your estate plan? Without proper estate planning documents like a will or living trust, state law determines how your property will be distributed to your heirs—generally family members—when you die. However, you can ensure your financial assets are passed on according to your wishes by naming beneficiaries, not just in your will but also for each of your accounts.

Unfortunately, designating beneficiaries on your financial accounts can easily slip to the bottom of your to-do list. But this task shouldn't be forgotten. It can help protect a sizeable portion of your estate and see to it that your financial assets go to the right people once you die, likely avoiding the probate process.

Typically, you'll want to name your spouse, children, or other financial dependents as your beneficiaries. However, you may also consider naming siblings, other family members, a friend, or even a nonprofit organization, trust, or your estate to inherit your account.

There are two types of beneficiaries: primary and contingent. The primary beneficiary is your first choice to receive your account funds. If your primary beneficiary is deceased—which is a good reason to update your beneficiaries periodically—your assets pass to your secondary beneficiary, or your contingent. In case a designated beneficiary predeceases you, a "per stirpes" distribution election allows the beneficiary's children to inherit their share.

Keep in mind that you can name multiple people or entities to be primary or contingent beneficiaries by splitting the proceeds among them. (The amounts don't need to be equal as long as the total percentage equals 100%.) 

Also, be sure to check if your state or account has any restrictions on designating your beneficiaries. Some may require your spouse to be listed as a primary beneficiary and receive a minimum percentage before you can list others. Your spouse may also need to give written permission if you decide to update your primary beneficiaries down the road.

Even if you already have a will or trust that outlines how your assets should be distributed upon your death, designating a beneficiary can be a powerful estate planning tool. For example, you can specify who should inherit your retirement accounts and life insurance proceeds without adjusting your will or trust documents.

In fact, beneficiary designations take precedence over wills and trusts in most cases, making them virtually probate-proof. Having beneficiaries on your account circumvents the probate process and helps make sure assets are transferred to heirs without delay. However, if a designated beneficiary predeceases the owner and there is no contingent beneficiary, the matter will likely need to be settled in probate court.

Regularly reviewing your account beneficiaries should be part of your financial and estate planning strategies. But certain life events and account changes demand immediate attention.

Marriage, divorce, the birth of a child or grandchild, the loss of a spouse or child—all these events can prompt a change in beneficiary decisions. Keeping your beneficiaries up to date helps you prevent inadvertently leaving money to the wrong people or a loved one out of your plan.

Also, anytime you close an account and move your money over to a new one, you'll need to take the time to specify your beneficiaries again. For example, if you recently rolled over a 401(k) from a former employer or transferred an existing IRA to a new financial firm, your beneficiary designations won't transfer over with your assets.

Generally, updating your beneficiaries is simple—you can often make changes online or by completing paperwork. If you need advice about designating your beneficiaries, talk to your financial advisor, estate planner, or estate-planning attorney to help ensure your final wishes are carried out. And consider discussing your decisions with family members to help avoid any surprises or conflicts.