When you’re planning your estate, you’ll hear much about beneficiary designations. They’re a fundamental part of the planning process, and it’s essential that you spend a lot of time thinking about them.
So what are they, and why are they so important? Let’s take a look.
What are Beneficiary Designations?
When someone passes away, their assets will go to beneficiaries. These are people or organizations that are previously designated to be the entity to receive that asset.
A beneficiary designation is an official act of naming who will receive those assets when the person passes. Remember that most people will do multiple beneficiary designations based on whom they want to receive assets.
For example, let’s say that Joe wants his son to receive his 401K portfolio and his daughter to receive his ROTH IRA when he passes away. He would use beneficiary designations to set that up.
Another thing to remember is that you can assign your estate as the beneficiary. The asset would then be treated as part of the estate, which would be distributed according to your will or trust.
The last thing we want to point out is that according to the SECURE Act of 2019, several categories of people are not eligible to be designated beneficiaries. Those groups include
A surviving spouse
Children under 18
Individuals with disabilities
Individuals who are chronically ill
Someone within 10 years of the deceased
So, for example, if your child is 17, they would not be considered eligible. But if they’re 25 and in good health, they could be.
Beneficiary Designations and Wills
Based on what you’ve read, you may think this sounds a lot like a will. After all, isn’t a major point of having a will the ability to designate how your estate gets managed when you pass away?
The short answer is yes. But a beneficiary designation is essentially something that takes precedence over your will.
Your will determines how your estate will be distributed
Your estate is essentially what’s leftover after designated beneficiaries get their parts
For example, let’s say you have three assets: an IRA, $10K in your savings account, and a house.
Well, maybe you decide you want to pass on the stocks to your adult daughter. You may decide to do a beneficiary designation to ensure she gets the portfolio. Your estate – the $10K and house – are then distributed as your will instructs.
This is an oversimplification to help explain the general relationship between wills and beneficiary designations.
Why is a Beneficiary Designation Important?
The short answer is that it helps guarantee that your assets get distributed how you want them to.
Going back to our last example, maybe you have certain assets that you definitely want going to certain people. By designating those people as beneficiaries, you ensure that happens. Just make sure this doesn’t conflict with your will!
While beneficiary designations are great, they can also be tricky in a way. You have to stay on top of them and keep them current. It may be that when you first set up your 401k, you were married but have since divorced. If your ex-wife is still the designated beneficiary, she will get the money when you pass – not your kids.
That’s why we always recommend that clients work with us. We will help you think through your designations and ensure everything, including your beneficiaries, will, and trust, are buttoned up so you can sleep better at night.