Importance of Assigning Beneficiaries on Qualified Assets

elderly couple listing their beneficiaries

Quite often, when people finalize their will or when they set up a trust-based plan, they are under the impression that their estate planning is complete. However, failing to assign beneficiary designations on qualified assets like retirement accounts and insurance policies can have unintended consequences. If you have questions about beneficiary designations, contact Surprenant & Beneski, PC today to learn more about our comprehensive estate planning services.

What Is a Beneficiary Account?

The funds in a beneficiary account will transfer to someone else after the account owner passes away. You can name a beneficiary for your life insurance policy, large investment accounts, and retirement savings account. You can also name a beneficiary for your bank account. Suppose you have a bank account and you’ve named your adult child as the beneficiary of the account. When you pass away, the funds in that bank account will automatically transfer to your adult child. 

Beneficiaries do not have access to your account while you are still alive. They can’t make deposits to or withdrawals from your account nor make any decisions about your account. They only gain ownership of the account after you pass away. We will discuss the nature of beneficiary accounts and five critical reasons why assigning beneficiaries on qualified assets is an essential aspect of estate planning. 

1. Your Beneficiaries Will Keep More Money and Get It Faster

Assets with a beneficiary designation will transfer outside of the probate process. Suppose you’ve named your spouse as the beneficiary of your retirement account. When you pass away, your spouse will automatically obtain ownership of the assets in your retirement account. Your spouse will not have to go through the legal process for settling your estate to access the funds in your retirement account. Instead, the assets are transferred as a matter of law to your spouse.

The probate process can last for a year or longer, especially if someone challenges the will. Going through the probate process also involves attorneys fees, court fees, lost time, and added stress. When your beneficiaries receive money through a qualified asset, they will immediately have access to the funds without having to pay legal fees and probate costs.

2. Beneficiary Designations Eases The Stress for Your Heirs

Learning that a loved one has passed away is always devastating. Trying to cope with financial issues amid the grieving process can be a heavy burden for your beneficiaries. Using beneficiary designations will help your beneficiaries be able to focus on grieving rather than trying to untangle your finances. Your estate plan should reflect your last wishes, but it should also save your beneficiaries time, money, and stress whenever possible.

How will the process work? Once the account holder receives notice of your death, they will notify the beneficiaries. Your beneficiaries won’t have to locate your account and try to log in to find information. After your loved ones provide your death certificate, the account holder will transfer ownership of the account to your beneficiaries. The entire process typically costs no more than $30, which is the cost to obtain a death certificate. In most cases, your loved ones will have access and ownership to your accounts within a month to 2 months, which is a much shorter time frame than going through the probate process.

3. Beneficiary Designations Could Override Your Will

Naming a beneficiary to your qualified assets is crucial. Failing to update your beneficiary designations can also be devastating for your estate planning goals. For example, if you recently married for the second time and forgot to change the beneficiary designation from your previous spouse to your current spouse. As a result, your money will transfer to your ex-spouse when you pass away. Even if you leave everything to your current spouse in your will, your ex-spouse will still be entitled to the assets to the beneficiary account.

Suppose you are a widow with two adult children. In your will, you give everything to your children, divided equally between them. Your primary assets are a large bank account and your house that are roughly equal in value. You change the title of your home and name your daughter as a joint tenant with the right of survivorship. You name your son as the payable on death designee on your bank account. When you pass away, your home value has appreciated by 30 percent. Your daughter will end up with 30% more assets than your son because the beneficiary designation will override your will.

4. Naming a Beneficiary Is An Easy Process

Naming a beneficiary is one of the easiest aspects of estate planning you can do. Assigning a beneficiary to a retirement account or an investment account involves a slightly different process, but they are both relatively easy to do. If you have an IRA or 401k, you can typically complete a beneficiary from within the account. You can choose your beneficiary when you create the account or leave it blank and revisit the account later to name a beneficiary.

With investment accounts and bank accounts, you’ll typically need to request a transfer of death form. If you have created a trust, you won’t need to worry about filling out a beneficiary form. By their nature, trusts always have a named beneficiary. Creating a trust also allows your beneficiaries to avoid the probate process.

5. You Experienced a Significant Life Change

It’s a good rule of thumb to revisit your estate plan any time you experience a significant life change. Similarly, you should review your beneficiary designations after a significant life change. None of us likes to think about passing away unexpectedly, especially not after a happy life event. However, it’s best to be prepared for this scenario. Whether you’ve recently gotten married, divorced, given birth, or adopted a child, it’s important to update your beneficiary designations right away.