Assigning a beneficiary to your accounts is a key step in ensuring your assets are distributed according to your wishes. This article explores the concept of a beneficiary and its role in financial planning.
Decoding the Term ‘Beneficiary’
At its core, a beneficiary is a person, institution, or entity designated to inherit the assets of another individual. The account holder arranges for their assets to be transferred to the beneficiary, usually upon their demise.
Who Can Be a Beneficiary?
A beneficiary can be a person, an institution, or an entity. However, there are certain factors to consider when naming them. Here’s a closer look:
- Person: This could be anyone the account holder chooses, not necessarily a relative. It could even be someone they don’t know personally. This is the most straightforward type of beneficiary to add to an account.
- Institution: This could be an educational institution, a hospital, or a non-profit organization. It’s crucial to verify with the institution if they can be named as a beneficiary, as not all institutions may accept this role.
- Entity: This refers to an organization without a physical presence, such as a trust. Such entities can be named as beneficiaries, but it’s important to confirm this with the company managing your account. Some companies may have restrictions on the types of entities that can be beneficiaries.
Which Assets Can Be Assigned to a Beneficiary?
Numerous assets can be assigned to a beneficiary. Here are some traditional ones:
- 401K’s
- IRAs
- Life Insurance Policies
- Non-qualified Annuities
- Health Saving Accounts
- Bank Accounts (though some banks may not permit this)
Just because your type of asset isn’t mentioned above doesn’t mean you can’t designate a beneficiary. In such instances, it’s advisable to consult with the company that manages your account. If they permit beneficiaries, that’s excellent. If not, you might want to consider setting up a trust or will to facilitate the transfer of those assets.
Why Should You Designate a Beneficiary?
There are several compelling reasons to designate a beneficiary for your account where possible. Here are five key reasons:
- Avoid State Control: By designating a beneficiary, you ensure that your assets won’t be seized by the state government. Also, if you claim them (since some assets are never claimed), you won’t have to pay a state fee. Instead, your assets will go directly to your designated beneficiary.
- Prevent Probate: Designating a beneficiary can reduce or even eliminate the need for probate, which can be a lengthy and complicated process.
- Clarity: With a designated beneficiary, you have the certainty of knowing exactly who will receive what and how much. This leaves no room for ambiguity for the beneficiaries.
- Ease of Update: Changing the beneficiary or their allocation is as simple as updating the name and percentage. You don’t need a lawyer for this.
- Priority: A named beneficiary on an account usually takes precedence over a will. This means that your wishes as expressed through your beneficiary designations will be honored first.
Optimal Practices for Beneficiary Designation
Even after you’ve designated beneficiaries to your accounts, there are certain upkeep tasks to ensure your intentions are carried out as planned. Here are some suggestions:
- Designate a Beneficiary: If you haven’t done so already, aim to assign a beneficiary to your account within a week of reading this article.
- Annual Review: Make it a habit to review your beneficiaries annually. Life events such as the birth of a child, divorce, or the death of a loved one may necessitate changes.
- Avoid Naming Your Estate: Try to avoid naming your estate as a beneficiary as it typically goes through probate.
- Consider Tax Implications: Be mindful of potential taxes or penalties that individuals named as beneficiaries might incur, especially if they are receiving government assistance.
- Include Contingent Beneficiaries: It’s prudent to name contingent beneficiaries in case the primary beneficiary cannot be located or refuses the asset.
- Choose Wisely: Reflect on the individuals to whom you’re leaving your assets. Some might misuse the inheritance. If you’re considering an institution or charity, ensure they align with your values.
- Understand Beneficiary Types for Life Insurance: There are two types of beneficiaries for life insurance: revocable and irrevocable. A revocable beneficiary can be changed at any time during the policy owner’s lifetime. An irrevocable beneficiary is permanent unless all named beneficiaries consent to the changes.
Summary
In summary, understanding the importance of designating a beneficiary can simplify matters for you and your family after your departure. By assigning beneficiaries to your accounts, you ensure your assets are distributed according to your wishes, benefiting both you and your beneficiaries while preventing the state from claiming your assets.