The Importance of Reviewing Beneficiaries on Your Accounts

In the hustle and bustle of managing our financial lives, it's easy to overlook the little details that can have outsized impacts. One such detail is the designation of beneficiaries on our financial accounts.

How often should beneficiaries be reviewed or updated?

You should review and potentially change/update after major life events such as marriage, divorce, the birth of a child, or the death of a loved one. However, if it has been so long since you looked at them that you no longer remember who you chose or if you even made a designation, then take that as a sign that you should review all your accounts.

Why Reviewing Beneficiaries is Important

Designating a beneficiary ensures that your assets are transferred according to your wishes. Failing to update these designations can lead to unintended consequences, such as assets being distributed to an ex-spouse or unintentionally bypassing your kids or other intended heirs.

Types of Accounts That Need Beneficiaries

Several types of accounts allow for beneficiary designations, and it's important to ensure these are correctly set up:

1. Retirement Accounts: This includes 401(k)s, IRAs, and other employer-sponsored retirement plans. These accounts typically allow you to name both primary and contingent beneficiaries.
2. Life Insurance Policies: Naming a beneficiary on your life insurance policy ensures that the death benefit is paid directly to your chosen individual(s).
3. Annuities: Like life insurance, annuities often allow for beneficiary designations to ensure the remaining funds are distributed according to your wishes.
4. Payable on Death (POD) and Transfer on Death (TOD) Accounts: These designations can be added to bank accounts and investment accounts, allowing the assets to bypass probate.

Common Mistakes in Listing Beneficiaries

Despite the importance of beneficiary designations, several common mistakes can occur:

• Not Naming a Beneficiary: Failing to name a beneficiary can result in your assets being subject to probate, which can delay distribution and increase costs.
• Not Updating Beneficiaries: Life changes, and so should your beneficiary designations. Regularly review and update your beneficiaries to reflect your current wishes.
• Naming Minors as Direct Beneficiaries: If a minor is named as a beneficiary, the court may appoint a guardian to manage the funds until the child reaches adulthood, which can be a cumbersome process.
• Ignoring Contingent Beneficiaries: Always name contingent beneficiaries in case your primary beneficiary predeceases you or is unable to accept the inheritance.

Accounts Often Overlooked for Beneficiary Designations

While most people remember to designate beneficiaries for their retirement accounts and life insurance policies, other accounts are often overlooked:

• Bank Accounts: Many people forget to add POD designations to their checking and savings accounts.
• Investment Accounts: Ensure that your brokerage accounts have TOD designations to facilitate a smooth transfer of assets.
• Health Savings Accounts (HSAs): These accounts can also have beneficiaries, ensuring that any remaining funds are distributed according to your wishes.

Common Misconceptions

• Entirely avoiding probate is the goal: Not necessarily! It may be beneficial to have one (or more) accounts purposefully go through probate. This recommendation could vary by state or your specific situation. Speak to an attorney to determine what is best for your situation and the best language to use on a beneficiary form to leave accounts to your estate according to your Will.
• My Will controls everything no matter who I list as a beneficiary: Incorrect! Most accounts with a beneficiary (such as a life insurance policy) bypass your Will and go according to how you listed beneficiaries. Be careful to coordinate your Will and beneficiaries listed on financial accounts to avoid unintentionally disinheriting someone or leaving the wrong amount to an heir.

In conclusion, you should occasionally review and update your beneficiary designations, especially after major life changes!