This might seem like an easy question to answer but as our financial lives tend to be complex with many moving parts, remembering to update your beneficiaries when life events occur is sometimes not at the forefront of our minds. Reviewing them at least once a year, if you have a change in marital status, the birth of child or grandchild or the death of a loved one can help ensure that they are what you intend them to be.
Beneficiary forms have become more thorough over the years and require additional information about the designees. Often times they allow you to elect for benefits to be paid per stirpes as well. Even if you haven’t had any life changes, it is worth reviewing your beneficiaries just to confirm that the details of each designee are current and accurate.
Here’s a quick reminder of the basics-
Types of Beneficiaries
- Primary Beneficiary– the first in line to receive the proceeds of your account. You can choose multiple persons or entities and detail the percentage you would like each to receive upon your passing.
- Contingent Beneficiary– also referred to as the secondary beneficiary as they would only receive the proceeds of your account if the primary beneficiary predeceases you. Just as you can choose a number of primary beneficiaries, so too can you choose multiple contingent beneficiaries. However, the contingent beneficiaries will only receive their benefits in the event that none of the primary beneficiaries survive the account holder.
- Per stirpes– a beneficiary designation that will allow for the primary beneficiary’s heirs to receive their share in the event your primary beneficiary predeceases you. For example, you have named your two children Julie and Jeff as primary beneficiaries in equal 50/50 share. If Julie predeceases you, the 50% share that Julie would have received will now go to her children as long as you have elected the per stirpes designation. Jeff would still receive the other 50% share. When there is a birth of child or grandchild in the family it’s important to review your beneficiaries to ensure that your documents accurately reflect your wishes. For more detail on the Per Stirpes option, read my colleague Sean Giles’ blog.
What accounts have beneficiaries?
When setting up a 401(k) or other employer sponsored retirement account, opening an IRA, or obtaining life insurance or an annuity, you will need to designate a beneficiary. These can be updated anytime by speaking with your HR representative for your 401(k) or life insurance through work and the financial institution that’s maintaining any other accounts.
When are POD/ TODs used?
Naming someone as a payable on death (POD) or transfer on death (TOD) beneficiary is effectively the same thing but for different types of accounts. You can add POD beneficiaries to all of your bank accounts and TOD beneficiaries to your brokerage or other investment accounts. This can be done simply by requesting the paperwork from your financial institution. By adding a POD/ TOD to these accounts, you will avoid having these assets go through probate as they would’ve previously passed through your will.
It is essential to remember that your beneficiary designations will override the contents of your will. For example, if you are remarried and have drafted a will stating that you would like all of your remaining assets to pass to your wife upon death but still have your ex-wife as the beneficiary on an old 401(k), unfortunately your ex-wife would inherit that account outright. The same would apply for the POD/ TOD titled assets.
By keeping your beneficiary designations and other estate planning documents current, you are effectively protecting the future well-being of your loved ones and ensuring that your assets will be distributed according to your wishes. If you’re not working with a financial planner to remind you, putting an annual task in the calendar is another great option.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Megan’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.