Who Are Your Beneficiaries?

Posted: Updated:
Elaine Bedel established Bedel Financial in 1989 in Indianapolis. Elaine Bedel established Bedel Financial in 1989 in Indianapolis.

When was the last time you updated, or even thought about, the beneficiary designations listed on your retirement accounts, life insurance, or annuity contracts? If you don't remember, it's definitely time to review!

How Beneficiary Designations Work

Beneficiary designations ensure certain assets owned by an individual transfer efficiently at her/his passing. Assets with designated beneficiaries transfer automatically, regardless of what is written in an individual's last will and testament or trust document. It is also important to know that beneficiaries have no access or rights to an asset until after the individual’s passing.

Because the new owner is determined without the guidance of the will document, assets with designated beneficiaries are excluded from the decedent's probate estate. The fewer assets that go through the probate process, the less cost associated with settling someone's estate.   

There are a number of different assets that transfer at death via beneficiary designation. These include retirement accounts (IRAs, Roth IRAs, 401(k)s, 403(b)s 457(b)s, pensions, etc.), life insurance death benefits, and the residual value of annuities. Beneficiary designations are important for accounts and policies that you have personally opened or purchased as well as those provided to you through your employer.

Types of Beneficiaries

Owners have the ability to name both primary and contingent beneficiaries. The primary beneficiary inherits the asset. However, if the primary beneficiary predeceases, then the contingent beneficiary becomes the new owner. If there is no contingent beneficiary listed, the asset will go into your general estate for distribution. For this reason it is important to name both your primary and contingent choices.

There are no restrictions regarding how many beneficiaries can be designated to inherit an asset. For example, if you have two children and wish to transfer equal shares of your 401(k) account to them after your passing, you would name both of your children as primary beneficiary and specify they would each receive 50 percent.

Charities can be named beneficiaries of assets, as well. Naming a charity as a full or partial beneficiary is a great way to transfer assets to an organization you care about at your passing. Since a charity does not pay income tax, leaving a taxable retirement account or annuity to a charity will allow 100 percent of the value to go toward the charity's mission. If an individual inherits either type of asset, there may be income tax due either immediately or as funds are distributed.  

A trust can also be named beneficiary. This is generally done to provide control over the asset to someone other than the inheritors. It is often used when minor aged children or individuals with disabilities are the ultimate beneficiaries. Using a trust as the beneficiary can be tricky and, therefore, it is advisable to do so only with the advice of an estate planning attorney or financial planner.

Simply naming your estate as the beneficiary of an asset is generally not a good idea. Doing so will subject the asset to probate and will produce unfavorable income tax treatment for retirement accounts. Please note that if you do not name a beneficiary where requested, the estate will become the default. Therefore, it is important to always name a beneficiary to avoid any potentially negative impact.

Review Periodically and Update as Life Changes

Take the time now to review your current beneficiary designations to be certain they reflect your desires. Whenever life circumstances change (marriage, birth, divorce, death), it is imperative that you update your selections as appropriate. A beneficiary designation can be changed at anytime as long as the owner is mentally competent to do so.

Coordinate Beneficiaries with Overall Estate Plan

Since assets with beneficiary designations transfer automatically, outside of a last will and testament or trust document, it is important to ensure that beneficiary designations complement your estate documents. For example, if you leave all of your assets to your child in your last will and testament, but have your ex-spouse listed as the beneficiary of your retirement account, the funds will transfer directly to your ex-spouse, not your child. Your estate attorney can provide guidance on how beneficiary designations should be stated in order to coordinate with your overall estate plan.

Summary

Because you work hard for your money, it is important to appropriately identify those who should inherit your property. Whenever you name or change a beneficiary, verify that the information was correctly recorded by the account custodian or insurance company. Mistakes are hard, if not impossible, to rectify after your passing.

Contributions were made to this article by Abby VanDerHeyden, a CFP candidate and Financial Planning Coordinator at Bedel Financial Consulting, Inc.

Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money" segment. Elaine's book, "Advice You Never Asked For... But wished you had," is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at ebedel@bedelfinancial.com.

  • Perspectives

    • Time Management: When and How to Work to Your Max Productivity

      Time is the one resource in your life that is neither replenishable nor renewable. Regardless of how you spin it, everyone starts each day on an equal playing field with 24 hours in the time bank. And while people often yearn for more time, what they really need is better time management. Understanding where your time goes, when you are most productive, and why you should protect yourself against distractions are the keys to achieving your max productivity.

    More

Events



  • Most Popular Stories

    • Photo courtesy of MutualBank

      MutualBank President Dies

      The President and Chief Operating Officer of Muncie-based MutualBank Pat Botts has died. In a statement on Facebook posted Sunday, the company said the passing was unexpected.

    • Photo courtesy of Indiana Premium outlets

      Simon Announces New Name for Shopping Center

      Indianapolis-based Simon Property Group Inc. (NYSE: SPG) has announced Edinburgh Premium Outlets will become Indiana Premium Outlets. The company says extensive enhancements are currently underway to reflect the new name and are slated for completion by Holiday 2019. 

    • (file photo courtesy of Radial)

      Radial to Hire 1,800 Seasonal Workers in Brownsburg

      Pennsylvania-based Radial Inc. has announced plans to grow its seasonal workforce in Brownsburg. The company, which opened its 700,000-square-foot fulfillment center in the Hendricks County city in June, says it will add 1,800 workers ahead of the holiday season. Radial is an e-commerce technology and operations company and says a dramatic increase in online spending will lead to higher demand for workers at the new facility this year. The jobs will mainly be...

    • Artist rendering of proposed headquarters for Ruoff Home Mortgage in Fort Wayne.

      Ruoff to Build New HQ in Downtown Fort Wayne

      Fort Wayne-based Ruoff Home Mortgage has announced plans to build a $43 million corporate headquarters in downtown Fort Wayne. Plans call for a 110-thousand square foot, nine-story structure, at the corner of Ewing Street and Jefferson Boulevard. The building would include leasable office and retail space, as well as a parking garage. It would overlook Parkview Field, home of the Fort Wayne Tin Caps minor league baseball team. The company is currently located on...

    • (photo courtesy of Aptiv)

      Irish Tech Company Coming to Westfield

      An Ireland-based technology company has announced plans to set up operations in Westfield. The city says Aptiv PLC (NYSE: APTV) will invest more than $9 million to open an engineering lab in the Westfield Business Centre and bring in 50 jobs.