Key Points

• Naming beneficiaries for financial accounts ensures your assets are going to the right people and spent in the right manner.

• Beneficiary designations supersede wills in court and also avoid probate court, eliminating painful, costly confusion and undue burden on survivors.

• Neglecting to set up beneficiary designations can create a costly and lengthy transfer process for heirs — and cause unnecessary due stress and burden.

As we build your balance sheet to achieve financial independence, we need to ensure you’ve considered what might happen to those savings when you pass away. One key action in this process is designating a beneficiary. 

Despite the immense importance of designating a beneficiary, according to a June 2019 study by Fidelity Investments, almost 60% of Americans haven’t named one on their retirement accounts. This is a mistake. Naming beneficiaries for your financial accounts not only ensures assets are left to the right people but also provides a framework to ensure those assets are spent as intended. 

Which Accounts Need a Beneficiary Designation?

It’s possible to have beneficiary designations on nearly all financial accounts on a balance sheet. Often, the most common types of accounts we see include Individual Retirement Accounts (IRA), company-sponsored retirement plans (401(k), 403(b) etc.), life insurance policies, annuities, and even government securities such as US Savings Bonds. They’re also found on college education savings accounts like 529 plans and Coverdell Education Savings accounts. Even bank accounts and brokerage accounts with a “pay or transfer on death” feature can have a designated beneficiary.

Who Can Be a Beneficiary?

Beneficiary designations are most commonly spouses, children, and immediate family members, but they can be nearly anyone and everyone. Trusts — whether revocable or irrevocable — can also be named as well. Charitable organizations can also be named.

With respect to the number of individuals or entities that can be named, that’s also flexible. Often we name just one person, but an account can be allocated across a number of beneficiaries.

There is an order of beneficiaries as well. There’s always at least one “primary” beneficiary. At Capstone, we also recommend naming at least one “contingent” beneficiary in case something happens to the primary. For spouses, we can use these beneficiary designations to ensure wealth is distributed per your wishes.

An example of how this might work:

 Red is married to Rose and has two adult children. Red and Rose are also heavy donors to Maroon Charity. Red has a company 401k plan, a Roth IRA, and a smaller Rollover IRA. Upon passing away, Red wants to take care of his spouse and children but also wants to donate to Maroon Charity. Red names Rose primary beneficiary of all accounts, so she has access to use the funds for her livelihood. He names his two children equal 50% contingent beneficiaries of the larger company 401k plan and Roth IRA. Red and Rose agree to name Maroon Charity as contingent beneficiary of the rollover IRA and primary beneficiary of Rose’s IRA, if she were to inherit it first.

Important Considerations When Designating Beneficiaries

The most important step anyone can take is to set up beneficiary designations in the first place. Neglecting to do so can cause retitling and transfer of assets to heirs to become both a lengthy and costly process. Non-retirement assets would flow into an estate which is administered by probate court and transfers according to a will (assuming there is one), while retirement assets are administered according to the terms of the administrator’s plan document. Though this might work fine, often there are issues related to probate court and plan administrator terms. This places undue stress and burden if their processes and asset flow don’t align with the decedent’s wishes.

Remembering to periodically review beneficiary designations is important, too, given life’s changes. You’ll probably want to avoid leaving a now ex-spouse as a beneficiary or neglect to add children as they’re born to ensure multiple children might inherit assets equally.

As we discuss in further depth in our article How to Jump-Start Your Estate Plan naming a trust as a beneficiary can alleviate many of the issues mentioned above and ensure that assets are administered appropriately. The trust document can provide broader clarification on asset distribution, add restrictions (in instances of spendthrift or minor heirs), and outline succession.

Capstone Helps You Designate Beneficiaries

At Capstone, we review and monitor beneficiary designations and account titling as a part of our planning process. We recognize the importance of ensuring your assets transfer and are spent according to your wishes as expressed to us. We work to maintain a full level of protection while minimizing the stress and financial impact that an estate in probate might have on heirs.

If you have questions about your financial accounts and how you should go about having your beneficiary designations set up, feel free to contact one of our Advisors. We’ll be happy to help.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.