Foundations
Understanding the building blocks of a well-designed estate plan
Understanding Beneficiary Designations
Understanding Beneficiary Designations
Many financial accounts and insurance policies allow you to name a beneficiary; the person or organization designated to receive certain assets after your death.
Beneficiary designations are relatively simple to complete, but they can play a significant role in determining where your assets go. They're commonly used with retirement accounts, life insurance policies, and certain other financial accounts.
Understanding how they work is an important part of making sure your broader estate plan reflects your intentions.
Why Beneficiary Designations Matter
A common misconception is that your will determines who receives everything you own.
In reality, assets with valid beneficiary designations generally pass according to the designation on the account rather than instructions in your will. That means an outdated designation can potentially send an asset to someone you no longer intend to receive it.
For that reason, beneficiary designations shouldn't be treated as separate from the rest of your
estate plan. Your accounts, legal documents, and current wishes need to work together.
Primary and Contingent Beneficiaries
When completing a beneficiary designation, you may have the option to name both primary and contingent beneficiaries.
A primary beneficiary is generally first in line to receive the asset.
A contingent beneficiary can receive the asset if the primary beneficiary cannot.
Naming a contingent beneficiary provides another layer of direction if circumstances change before your designation is updated.
The exact options and rules depend on the type of account or policy, so it's important to understand the requirements that apply to what you own.
Beneficiary Decisions Deserve Careful Thought
Choosing a beneficiary can appear straightforward:
Who should receive this asset?
But the answer sometimes deserves additional consideration.
For example, naming minor children directly as beneficiaries can create complications because minors generally cannot manage inherited assets themselves. Depending on the circumstances, additional legal or financial arrangements may be needed to manage those assets for them.
Other circumstances, such as blended families, beneficiaries with special needs, or more complicated planning goals can also make beneficiary decisions more nuanced.
The point isn't that beneficiary designations are complicated. It's that a simple form can carry significant consequences.
Review Your Beneficiaries as Life Changes
Beneficiary designations are often completed when an account is first opened and then forgotten.
Marriage, divorce, births, deaths, changing relationships, and other significant events can all affect whether an old designation still reflects what you want.
A periodic review can be as simple as confirming:
Who is currently named?
Are my contingent beneficiaries still appropriate?
Does this designation still reflect my intentions?
Does it work with the rest of my estate plan?
That last question is especially important. A beneficiary designation shouldn't be considered in isolation; it is one part of a larger plan for how your assets and responsibilities will be handled.
Sometimes the most important estate planning decisions are the ones people assume have already been taken care of.
