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What to Consider Before Choosing Your Beneficiaries

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6 Things You Need to Know

Choosing your beneficiaries is an important part of the estate planning process and a decision that shouldn’t be taken lightly. Beneficiary designations allow you to declare who will inherit your financial accounts and insurance benefits after you’re gone. The decisions you make can have a significant impact on your loved ones’ lives, so it’s important to understand what role beneficiary designations play in your overall plan. Here, we provide some beneficiary basics and tips to help you choose who to designate.

The importance of beneficiary designations

Beneficiary designations are deceivingly simple, yet their significance shouldn’t be overlooked. Developing an estate plan takes time and effort, and your beneficiary designations are a significant part of that planning. It may seem as easy as writing someone’s name in when it comes time to name your beneficiary; however, mistakenly choosing a beneficiary who’s not aligned with your wishes has the potential to derail your estate planning efforts.

One of the most crucial pieces of information to know about beneficiary designations is that they take precedence over anything written in your will. For example, if you listed uncle John as your beneficiary on your IRA account but your will says you would like the account to go to Aunt Susan, Uncle John would ultimately be the one to inherit the assets after you’re gone because he’s the one named as the beneficiary on your account. Don’t make the mistake of taking the time to structure a will or trust that meets your exact needs only to forget about making the changes necessary on your beneficiary designations.

Beneficiary designations are often overlooked because they’re made at the time of the account opening or policy placement, and account/policy holders seldom receive reminders to review and make necessary updates throughout the years. Unfortunately, there’s no central source that holds all beneficiary designations, which can make it challenging to remember what’s assigned. Beneficiary designations require regular review and should not be a “set it and forget it” item on your financial checklist.

Considerations when choosing your beneficiaries

When choosing or updating your beneficiaries, it’s important to consider the following.

Your estate planning objectives

Your estate plan may require updating throughout the years due to changes in your wishes, your family dynamics or the laws surrounding estate planning. Because beneficiary designations typically supersede the instructions in your will and trust, it’s important to ensure all beneficiaries are always consistent with your other estate planning documents and legacy goals.

Make a list of all accounts for which beneficiaries are designated and set reminders to review these designations on a regular basis — and especially upon major life events, such as marriage, divorce, the birth of a child, the death of a beneficiary, etc.

Minor children

Minors can’t directly inherit financial accounts or life insurance proceeds. If you designate a minor as your beneficiary, the court may need to appoint a guardian to oversee the inherited assets, which can be a lengthy and expensive process. Instead of appointing minor children, consider designating a trust or a trusted adult to oversee the management of your assets if you were to pass away while you have minor children.

Special needs beneficiaries

If you wish to financially support a loved one with special needs, it may seem logical to designate that person as a beneficiary. However, doing so may have the opposite effect if the inherited assets make them ineligible to receive needed government assistance.

In this case, it may make sense to establish a special needs trust and name the trust as the beneficiary. A special needs trust can allow you to distribute assets to your loved one without disqualifying them from government assistance. This is a complex financial strategy, so be sure to consult with your wealth manager and estate planning attorney before implementing.

Charitable giving goals

If your legacy goals include supporting charitable causes, consider naming a charity as your beneficiary. Depending on your specific objectives, there are two main ways to give to charities using your beneficiary designations.

  • Name the charity as a direct beneficiary –You can designate a charitable organization as a sole beneficiary or designate a certain dollar amount or percentage of assets to go to the charity, with the remainder to be distributed to your heirs.
  • Establish a donor-advised fund (DAF) and name it a beneficiary – A DAF is a type of account that allows you to dedicate assets specifically for future charitable donations. By designating a DAF as a beneficiary on your accounts, the DAF can make donations to charitable causes that matter to you. Naming a successor on your DAF can ensure that person can continue carrying out your charitable intent long after you pass away.

Family dynamics

Each family has its own unique circumstances and dynamics. Perhaps you’re divorced or otherwise estranged from a loved one. Maybe a child proceeded you in death or you recently remarried. Whatever your specific situation, it’s important to take family dynamics into consideration when designating beneficiaries. Family dynamics can change over time, and it’s important to regularly review your beneficiaries to ensure they’re aligned with your desires as your life and relationships evolve.

Contingent beneficiaries

In addition to your primary beneficiaries, it’s also important to consider who you wish to name as contingent beneficiaries. In the event a primary beneficiary predeceases you, a contingent beneficiary is a secondary election to designate the next heir in line to receive your assets.

Could you use some help ensuring your beneficiaries are in line with your overall financial goals and estate planning objectives? Creative Planning is here for you. Our experienced professionals work to ensure every aspect of your financial life is well cared for and helping you achieve your long-term goals. Schedule a call to learn more.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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