Beneficiary Designations: The Small Detail That Makes a Big Difference
When you think about estate planning, your mind might go straight to writing a will or creating a trust. But there’s another piece of the puzzle that’s just as critical—beneficiary designations. Naming and updating your beneficiaries is one of the easiest ways to ensure your financial legacy aligns with your intentions. Yet, it’s often overlooked or misunderstood.
At its core, a beneficiary designation allows you to name who will receive assets like retirement accounts, life insurance policies, or investment accounts after you pass away. These accounts bypass your will entirely, meaning the beneficiary listed on these forms takes priority over anything written in your estate plan. This is a good thing—it simplifies the transfer process, avoids probate, and ensures assets reach the intended person quickly. However, it only works if your designations are accurate and up to date.
Why Keeping Beneficiary Designations Current Matters
Life changes, and so should your beneficiary choices. Major milestones like marriage, divorce, the birth of a child, or even the passing of a loved one can shift your priorities. Yet, it’s easy to forget to make updates, which can lead to unintended consequences. For example, an account might still list an ex-spouse as the beneficiary years after a divorce or a deceased parent instead of your children. A quick review can prevent these kinds of oversights.
Another detail that’s often missed is naming a contingent beneficiary. This person acts as a backup if your primary beneficiary is unable to inherit the assets. Without one, your account might end up in probate, negating the very simplicity beneficiary designations are designed to offer.
Common Mistakes to Avoid
- Not Naming a Beneficiary: Leaving the beneficiary field blank is more common than you might think. If no one is listed, the assets typically default to your estate, forcing them through probate - a costly and time-consuming process for your loved ones.
- Naming Minors Without a Plan: While it may seem natural to name a child as a beneficiary, minors cannot directly inherit funds until they reach the age of majority. This can lead to court involvement to manage the funds. A trust is often a better option to protect and manage these assets.
- Forgetting to Update After Life Events: Whether it's a marriage, divorce, or the arrival of a new family member, failing to update beneficiary designations means your assets might not align with your current wishes.
- Ignoring the Roles of Contingent Beneficiaries: Without a secondary (or contingent) beneficiary, assets could still be delayed or contested if your primary beneficiary is no longer available.
How to Stay on Top of Beneficiary Designations
The good news is that managing your beneficiary designations doesn’t have to be complicated. Start by gathering a list of all accounts that allow for beneficiary designations, including retirement accounts, life insurance policies, and bank accounts. Carefully review the names, relationships, and any allocation percentages.
Make it a habit to revisit these designations annually or whenever a major life event occurs. For example, if you’ve recently had a child, gotten married, or experienced a loss in the family, it’s the perfect time to review and update these choices.
For complex situations—such as providing for minors, multiple heirs, or unique family dynamics—working with a financial advisor or estate planning attorney can help. They’ll ensure your choices align with your overall financial plan and legacy goals.
Beneficiary designations might seem like a small administrative task, but their impact is anything but. They streamline asset transfers, reduce stress for your loved ones, and make sure your legacy is preserved as you envision. Taking a proactive approach today can save your family time, money, and unnecessary headaches in the future. At Birch Street Financial Advisors, we will review all of your beneficiary designations to make sure they align with your legacy intentions. We can help you keep them updated as you navigate your life changes.
