One important element of estate planning is beneficiary designations, which are instructions you provide to financial institutions and insurance companies about who should receive your proceeds when you pass away.
Beneficiary designations allow you to specify who will inherit certain assets without the need for a will or probate. These designations are legally binding, so you must make selections carefully and keep them up to date.
Advantages of beneficiary designations
Beneficiary designations allow you to avoid probate, which is a legal process that involves locating assets, contacting creditors and providing funds to heirs. Assets with beneficiary designations bypass probate and go directly to the named beneficiaries, saving time and reducing expenses.
Avoiding probate also means that your assets and their distribution remain private. Keep in mind that probate is a public process, which means that others can access information regarding it.
Types of assets with beneficiary designations
Several types of assets have beneficiary designations:
- Retirement accounts – IRAs, 401(k)s and other retirement plans allow you to name beneficiaries. If you do not designate a beneficiary, these assets may become subject to probate.
- Life insurance policies – Life insurance proceeds can provide financial support to your loved ones and designating beneficiaries ensures a smooth transfer of funds.
- Bank accounts – Some bank accounts, like payable-on-death or transfer-on-death accounts, allow you to name beneficiaries who will inherit the funds after you die.
When creating retirement and bank accounts, or initiating an insurance policy, you will receive instructions on how to accurately complete beneficiary designation forms.
Keep beneficiary designations up to date
You must review your beneficiary designations periodically, especially after major life events such as marriage, divorce, the birth of children or the passing of a loved one. Failing to update your designations could lead to unintended consequences, such as funds from accounts and life insurance policies going to the wrong person.
As reported by CNBC, 67% of U.S. residents admit to not having an estate plan in place. Along with wills and trusts, completing beneficiary designation forms is an important part of the estate planning process that can save your loved ones time and money.