Do this before you create (or update) your will
You have probably heard the (sometimes scolding) advice to “create an estate plan”. The people who say this often have good intentions, but it’s not always clear what an estate plan is, and don’t those cost money? So, we put it off.
What if I told you the most important part of your estate plan is free? And you can do it right now; no attorney is needed.
What is a beneficiary designation?
If you are like most people, a significant portion of your assets are held in retirement accounts or life insurance policies. A beneficiary designation is a contract with your account custodian (the institution that holds your assets, e.g. Charles Schwab) that allows your assets to transfer to a specific person(s) – the beneficiary(ies) – at your death.
A beneficiary can be a person, but it can also be an entity such as a church or a charity. Further below I will discuss the considerations of selecting beneficiaries.
Why do I need to do this?
If you die without designating beneficiaries, your assets will be transferred to your estate, which is a temporary entity created for the deceased. To get assets from your estate to your heirs, your estate must go through a slow and expensive court process called probate.
Even if your assets are transferred by a will, your estate will still go through the probate process.
By designating a beneficiary, you enable your heirs to skip the probate process and transfer your assets directly from your account to theirs.
Whom should I select as my beneficiary?
This is a personal question that should reflect your values and wishes. While it may feel like a daunting task, the good news is you can always change your beneficiaries – and you don’t have to pay an attorney to do it.
Most people I work with (though certainly not everyone) choose their spouse as a primary beneficiary and their children as contingent beneficiaries. (The contingent beneficiary acts as a backup in case all your primary beneficiaries die before you do.)
I’ve also worked with a woman who does not have children, and she selected her nieces and nephews. There’s another woman who chose to split her assets among her favorite charities.
Whatever you do should be your choice, and you should not feel like you must do things a certain way just because so-and-so said so. However, it is probably a good idea to discuss your wishes with your children to prevent any misunderstandings or conflicts when you are gone, and they are settling your estate.
How do I designate a beneficiary?
Your account custodian should have an online portal allowing you to designate your beneficiary. If it’s not available online, you may have to call the customer service line to request a paper form.
Beneficiaries are designated on a per account basis, so you will need to designate a beneficiary for each account (Roth IRA, 401(k), life insurance, etc.) This per account designation makes for more work, but gives you greater flexibility when giving, as I discuss below.
You can select one person – e.g. your spouse – to receive 100% of assets, or multiple people – e.g. your children – to receive a portion of your assets. If you select multiple people, you choose to split your assets any way you like – equal or not.
Can I name my church or favorite charity as a beneficiary?
Yes!
The best assets to give to your church or charity are Traditional (pre-tax) 401(k)s or IRAs. These assets would be taxed if inherited by a person, but a tax-exempt organization can receive the full benefit of your gift.
A financial planner can help you create a giving plan to minimize taxes for your heirs. Visit our contact page to ask a question about your situation.
Take action!
Review your financial accounts and insurance policies and make sure you have beneficiaries. Do you need to update your beneficiaries? Call your custodian and ask them how to do it.
About the Author
Joseph Fowler, CFP® is a financial planner and co-owner of 402 Financial in Lincoln, NE.
402 Financial provides financial planning and investment management services to people approaching or in retirement. Joe always acts as a fiduciary and never takes commissions on product sales.
Click this link to schedule a free consultation with Joe.
