Naming beneficiaries is a crucial (and often-overlooked or mismanaged) step in the estate planning process.
Why is it so important? By designating a beneficiary, financial institutions like SELCO can quickly disburse your funds to that person after you’re gone. But when no one is named, the process gets complicated, as funds are put on hold and your estate goes through the probate process in court.
“When there are no living owners on an account and no beneficiaries were named, your financial institution has to rely on court documents to know who can act on behalf of the deceased’s estate,” said Kent Hancock, Membership & Account Administration Manager at SELCO. “Waiting for those documents can place a financial hardship on surviving family members. Naming a beneficiary prevents that potential hardship.”
To ensure your assets are passed on according to your wishes, let’s explore the ins and outs of naming beneficiaries—as well as a few missteps to avoid.
What is a beneficiary, and who/what can be one?
A beneficiary is any person or entity you designate to receive assets like retirement accounts, brokerage accounts, checking and savings accounts, or payouts from life insurance policies upon your death.
There are two types of beneficiaries: primary and contingent. At SELCO and many other institutions, it’s common for only a primary beneficiary to be named. The primary is first in line to receive your assets, and when a contingent is named, they will receive the assets if the primary passes away or refuses the assets.Your siblings, a friend, even a nonprofits, charities, and trusts can all be beneficiaries.
Be strategic when naming beneficiaries
Even if you have a will or trust outlining your wishes, beneficiary designations for specific accounts make sure your assets go to the right people. In fact, the names listed on retirement accounts, life insurance policies, and transfer-on-death (TOD) accounts often take precedence over what’s written in your will or trust.
For example, if you wrote in your will that all your finances should go to your spouse but then you designate both your spouse and your children as beneficiaries of your IRA, the funds in that account will be equally distributed among your family members.
“You’ll want to be as clear as possible when naming beneficiaries so there’s no guesswork of how you want your accounts handled,” Hancock said. “For example, if you name a charity as a beneficiary, provide the address of where funds should go so it’s clear if you want them sent to the national organization or the local chapter.”
Not to mention, your loved ones would avoid a potentially long, drawn-out probate process. Check out this How-To tutorial for steps on adding a beneficiary to your SELCO accounts.
Mistakes to avoid when naming beneficiaries
To ensure a smooth wealth transfer, you’ll want to avoid common pitfalls when naming your beneficiaries. Here are a few of the main culprits:
- Not regularly reviewing your beneficiary list. A “set it and forget it” tactic can create confusion and unnecessary stress when it comes time to distribute your finances. Forgetting to update forms after major life changes like a divorce, remarriage, or death could result in your assets being legally inherited by an ex-spouse or going straight to probate.
- Naming minors as direct beneficiaries. Because minors are unable to manage or receive large sums of money from a retirement account or insurance policy, it’s frowned upon to name them beneficiaries. If you do choose to name a minor as a beneficiary, be sure to also designate a guardian in your will.
- Divvying up your accounts to each child. If you have more than one retirement account or insurance policy, the best practice is to name all your children as joint beneficiaries rather than assigning separate accounts to each child. Over time, the balances may grow at different rates, resulting in an unbalanced inheritance.
By listing a beneficiary on your financial accounts, you’ll provide peace of mind for your family during a difficult time. If you need guidance on naming a beneficiary, don’t hesitate to call us at 800-445-4483. We’ll be happy to help.
“Coping with a death can be devastating,” Hancock said. “Having beneficiaries named can remove some of the stress and confusion for family members and ensures your wishes are followed.”
