When you open a retirement account or buy a life insurance policy, you’re asked to name a beneficiary. It might seem like just another form to fill out, but this simple step can affect your family’s future.
Many people don’t give beneficiary designations much thought after signing the initial paperwork. It may have been years ago, and life has moved on. But this might surprise you: These designations can override what’s in your will or living trust. That means your retirement accounts and insurance proceeds could end up going to someone you didn’t intend, creating what professionals call an accidental inheritance.
Life changes quickly. You might get married, divorced or remarried. You might have children or stepchildren. A loved one might pass away. You may decide to give to your favorite charity. Any of these events could mean it’s time to update your beneficiaries.
The rules can get complicated. For example, after a divorce, some (but not all) states have laws that automatically revoke your beneficiary designations for IRAs, bank accounts and insurance policies. But no matter where you live in the U.S., the designations for 401(k) plans and pensions stay in place until you change them. In community property states, couples must split 50-50 the assets they acquired during marriage, adding another layer of complexity.
There are other considerations, too. It’s a good idea to name a primary and a contingent beneficiary. If your primary beneficiary dies before you do, the contingent beneficiary receives your assets. Without this backup plan, your carefully considered wishes could go awry.
Naming minor children as direct beneficiaries isn’t usually a good idea. Children can’t legally receive and control assets until they become adults, so a court would have to get involved and appoint a guardian for managing the money. Instead, you might set up a trust or name a custodian to oversee the funds until your children are mature enough to handle them responsibly.
For family members with special needs, you’ll want to be especially careful as about choosing your beneficiary. Some choices may jeopardize their eligibility to receive government benefits such as government disability payments or Medicaid. An estate attorney can help you make important beneficiary decisions.
One major benefit of proper beneficiary designations is that they can help your loved ones avoid probate, a time-consuming and potentially expensive legal process.
For these reasons and others, it’s important to review your beneficiary designations regularly, especially after major life events. Contact your retirement account administrator or insurance company to update any outdated information.
A financial advisor can help you understand how your beneficiary choices fit into your financial strategy and ensure your assets go where you want them to go. It may also make sense to work with a legal professional who can help you ensure your beneficiary designations align with your plans for transferring your estate assets.
Don’t leave these important decisions to chance. Taking time now to review and update your beneficiaries can help give you a sense of security and protect the people you love.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.
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