Are you a recent college or high school graduate? Or are you newly employed with that big ‘adult’ job? Have you thought about how much you will save, what will you splurge on buying, or what will you do with that first paycheck? As a young adult, and starting a new career, there are some financial decisions you make without thought. Sometimes you say “I’ll look into it later”, so it becomes out of sight, out of mind. You don’t really think about end of life decisions, because you are just starting to live… right! You may think “That kind of stuff is for older people to do”. In reality, you should be thinking about it!
It rarely seems that there is a right time to sit down and make financial plans for the future, update beneficiaries, create a Will, etc. This type of planning usually gets moved to “I’ll look at next week”. I know, because I have done this myself. It is important however, at any age, to plan, review, and update according to life changes (getting married, having children, getting divorced etc.). No matter how old you are, planning for your wishes is important because it helps in the event something were to happen unexpectedly. With that said, beneficiaries should not be the last thing you think about!
What is a beneficiary? It is someone (or a legal entity such as a trust) that is entitled to money upon your passing. The beneficiary designation takes precedence over what is in your Will. Let me repeat that because it is very important, Beneficiary designations take precedence over what is in your Will. That means, if your ex-husband (ex-wife) is listed as the beneficiary of your $50,000 IRA and you pass away, it does not matter what your Will says, in most cases your new spouse would not be entitled to that money!
My family experienced a similar situation when my brother passed away. He had an insurance policy that he thought had lapsed; and he never verified or changed beneficiaries after his divorce. After his passing, instead of his children receiving the insurance distribution directly, it was given to the beneficiary designation, his ex-wife.
Assets are generally transferred in the following ways:
- Ownership: Certain assets that are held jointly automatically go to the surviving owner.
- Beneficiary Designation: Assets pass to person(s) or entity designated as beneficiary on certain contracts or accounts, such as life insurance policies, annuity contracts, 401(k) plans, and IRAs.
- Trust: Assets transfer according to terms of trust.
- Will: Assets that aren’t transferred by ownership, beneficiary designation, or trust will be distributed according to the terms of your Will. If you do not have a will, assets will then transfer according to the laws of your state.
Here are some reasons why you should name proper beneficiaries:
It costs nothing, but a few minutes of your time – Most of the time you can make beneficiary changes by logging into your account online or requesting a change of beneficiaries form. Making changes to a Will, involves signing updated documents and attorney fees.
Saves on probate cost – Costs will vary based on the amount and complexity of the estate. Attorneys will typically charge 2% - 4% of an estate to settle affairs. Listing heirs as beneficiary, is more efficient and cost effective.
Keep matters private – When a Will is in probate it becomes a matter of public record. Anyone has the ability to look at how assets were divided, how much money the deceased person had, etc. The beneficiary designation provides privacy and allows you to divvy up assets as you deem appropriate. This can help avoid hostilities between siblings, previous spouses, or other family members.
Quicker than probate – It is not uncommon for probate of an estate to take a year or longer depending on the complexity. This means assets can be tied up or not accessible during that time. When beneficiaries are properly designated, their portion of benefits can be accessed as soon as a week or two after death.
Ensures people get what you want after passing – Remember, regardless of what your Will says, the beneficiary form dictates how the associated asset is distributed. Which means, it is important to keep the beneficiaries current or the distribution can become very complicated if the beneficiary is someone who has passed away.
Common Mistakes to Avoid in Beneficiary Designations
- Failing to review beneficiary designations periodically
- Failing to name a contingent beneficiary
- Not Identifying a new beneficiary after the death of a primary beneficiary
- Forgetting to remove an ex-spouse after divorce and /or remarriage
- Neglecting to complete a separate beneficiary form for each plan or arrangement, and/or mistakenly assuming that a separate beneficiary can be designated for individual accounts within a plan or arrangement
- Failing to update beneficiary designations after the birth or adoption of a child
- Young, single adults naming their parents as beneficiaries, then forgetting to update the forms after they marry, or have children, and/or their parents die
- Naming the owner’s “estate” as beneficiary without guidance from an estate planning attorney
- Naming a minor (or even young adult) directly as a beneficiary and forget to select a guardian. The court will appoint a guardian for you and it may not be the person you would choose.
Frequently Asked Questions about Beneficiary Designations
I have a Will – isn’t that enough? No. Regardless of what your Will provides, your retirement accounts will pass to the beneficiaries designated on each account – or perhaps according to the default provisions of your retirement plan. Time may have passed, your life circumstances may have changed, and your designated beneficiaries may no longer reflect your current wishes. If you neglect to update your beneficiary forms, your retirement money may not get distributed the way you intended.
Do I need contingent beneficiaries? Yes. It’s best to name a contingent beneficiary. If you haven’t and your primary beneficiary dies before you, the assets will be distributed according to the rules in your retirement plan, IRA, or 401k document upon your death.
The important take away message is to follow-up. Review beneficiary designations every few years and always review them when a life-changing event occurs, such as a marriage, divorce, birth, or death of a loved one. Include all investments, financial accounts and insurance policies. Here are just a few types of accounts that typically have beneficiaries associated with them:
- Bank Accounts
- Retirement Accounts
- Traditional IRA & Roth IRA
- Savings Bonds
- Life Insurance, including Term Life, Whole Life and Employer Paid Life (also called Group Life)
To verify beneficiaries for your ECU Credit Union accounts, they are listed on your monthly statement. If you do not have beneficiaries listed call us at 800-382-2400 to update or add beneficiaries to your Credit Union accounts. We will be happy to help update your accounts. As a reminder to add a beneficiary to your account we will need the beneficiaries’ legal name, address, date of birth, and social security number.