As your life changes, so do your plans, policies, and designations. Significant life events, like marriage, domestic partnership, birth, adoption, the transition from training to practicing medicine or dentistry, paying off your student loans, or purchasing a new home, can all affect your financial planning. Likewise, unanticipated life changes, such as divorce, death, and job changes, may cue you to review your plan and policies.
When signing up for a retirement plan, investment account, or life insurance policy, you will likely be asked to designate a beneficiary. If you haven’t checked or updated who you selected as your account beneficiaries recently, they may no longer reflect your current wishes. Without living heirs, your assets may be transferred to your state, and then state law decides who receives it.
A beneficiary is a living person or an entity (like a non-profit, church, university, etc.) that will inherit all or a portion of the balance of a retirement or life insurance account after the death of the asset’s owner. You may name or designate one or more individuals, including a trust or your estate, as a beneficiary. You are often are required to name them for investment accounts, such as IRA’s, qualified plans through your employment, or life insurance policies.
Selecting a beneficiary should be a top priority whenever you open a financial account. As your life changes, which we all know does, it is essential to make sure you update the beneficiary information on all of your accounts and plans. It is easy to overlook. However, to ensure your wishes are followed after you die and to save your survivors the stress, below are a few reasons.
Ask yourself:
It is critical to review your beneficiaries whenever you experience a significant life event to ensure your beneficiary designations for eligible plans, policies, and accounts are correct and reflect your estate planning documents.
When you designate a beneficiary on all of your relevant accounts, you will ensure that your chosen designation will receive your retirement or life insurance benefits.
If your beneficiary’s contact information has changed, you will need to update your plans. When a provider is not able to contact a beneficiary, it could delay payment.
If you die without naming someone a beneficiary, it may delay the transfer of funds.
Did you know that the United States Supreme Court ruled in 2018 that beneficiary designations supersede a will or trust? So make sure your designations match those listed in your will or trust to keep your beneficiaries don’t waste time in court.
Fortunately, changing or updating your beneficiary isn’t difficult to do.
If, for some reason, you chose not to select a beneficiary for your assets. In that case, your beneficiary may be determined by federal or state law or by the plan documents that govern your accounts.
If you are married, you may be required to obtain spousal consent to designate a non-spouse as the primary beneficiary.
Most retirement plan documents have a standard beneficiary designation option. For example, suppose you submit two individuals as your designated beneficiaries, and one dies prior to your death. In that case, the share marked for the deceased beneficiary is automatically redirected to the surviving beneficiary.
You can look into a customized designation if you prefer to choose how that portion is distributed instead of relying on the standard beneficiary designation. For instance, if one of your beneficiaries has children, you can designate those children to receive the primary beneficiary’s share if they precede you in death.
You can explore various customized beneficiary designations to find the one that best meets your needs. However, remember to review the beneficiary designation thoroughly to ensure your elections are carried out the way you expect.
Per Stirpes Designation
Per stirpes is a Latin phrase meaning “by roots” or “by branch.” In the estate planning context, a per stirpes distribution indicates that if a primary beneficiary dies before you do, the heirs of the named beneficiary are entitled to the benefits. Spouses are generally not part of a per stirpes distribution.
Per Stirpes example:
Per Capita Designation
Per capita is a Latin phrase that means “by head.” In a per capita, distributions can only go to the name beneficiaries. They are not able to pass on to the next generation. Essentially, they go to the estate should the named beneficiary predecease the plan/benefits holder. They are distributed equally among the beneficiaries who are alive.
Per Capita example:
Because customized designation can be complex, consulting a trust and estate planning attorney before finalizing any decisions is generally a good step.
TIP: Don’t forget to examine the tax implication for the kinds of beneficiaries your select, like a spouse or partner, a charity, a trust, or your estate.
You have likely spent some time thinking about and creating your will and other estate planning documents. You may have even discussed the provisions with your attorney and reviewed the documents before putting your name on the dotted line. However, you probably spent far less time planning for the designation with your retirement accounts and life insurance policies. Please take a moment to designate your beneficiaries and keep them current on all your financial accounts and coordinate with your estate plan to protect your loved ones. No matter how good your estate documents are, the beneficiary designations supersede your will.
At Spaugh Dameron Tenny, our team of financial planners is always happy to help you understand your financial documents. We can also support you in updating your beneficiary designations.
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The team at Spaugh Dameron Tenny works to present timely educational content that benefits doctors and their unique financial situations.
