By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected]
Having appropriate and up-to-date beneficiary designations is an important part of the financial planning process. It is not enough to build wealth over time, people also want their assets to go to beneficiaries that they care deeply about (e.g., spouses, children, and/or charitable organizations). Personal Financial Managers (PFM) staff are often involved in discussions with clients about selecting beneficiaries to inherit their assets.
Beneficiary designations are required for life insurance policies, individual retirement accounts (IRAs), employer retirement savings plans (e.g., the TSP), and some annuities, so the proceeds of these accounts can be transferred to beneficiaries free of probate. It is also wise to name contingent beneficiaries in case primary beneficiaries pre-decease the person naming them in a document or wish to disclaim assets (this is typically done for estate planning purposes).
Below are seven key action steps about beneficiary designations to share with military families:
1. Consolidate and Review
List all beneficiary designations for multiple financial documents in one place. Otherwise, it is very easy for people to lose track of who they named as beneficiaries. To help make this task easier, Rutgers Cooperative Extension has a downloadable form, Beneficiary, and Personal Representative Designations, that includes spaces to list beneficiaries for life insurance policies, retirement savings plans, and more.
2. Revise as Needed
Review beneficiary designations periodically, especially after life events such as marriage and the death of a beneficiary. It is not unusual for people to change beneficiaries several times throughout their lifetime. For example, they might name parents as beneficiaries on a retirement savings account as a young adult and switch to naming a spouse later. If that relationship subsequently ends, they will need to name a new beneficiary again.
3. Avoid Inertia
Share “war stories” to prompt action. For example, some people do not keep track of their named beneficiaries. This is a big mistake. First, assets could be transferred to someone they no longer wish to leave a bequest to (e.g., an ex-spouse). Second, if there is no living named beneficiary or contingent beneficiaries, assets transfer to the owner’s estate and go through the probate process with additional estate settlement expenses. A third common error is having provisions in a will conflict with beneficiary designations, which take priority.
4. Know-How to Make Changes
Contact the plan administrator to complete the required paperwork for retirement savings plans such as the TSP. Life insurance policy owners need to contact their insurers. In the case of tax-deferred retirement savings plans outside of work, such as IRAs and annuities, contact the plan custodian. Many financial services firms allow clients to change their beneficiary designations online with a password-protected account user name. In most cases, beneficiary designations can be changed without a beneficiary’s consent.
5. Decide Carefully
Prioritize named beneficiaries. In many families, the most important beneficiary is a spouse. People want to make sure that sufficient assets are left to cover his or her living costs. If a spouse is well taken care of, they may also name other beneficiaries such as children. However, property inherited by minors can be tricky. A guardian must be appointed by the court to manage the assets of minor children until they reach legal age.
6. Know Your Beneficiaries
Consider the resources and characteristics of potential beneficiaries by answering three key questions: What are their financial needs? How old and self-sufficient are they? and Are they capable and mature enough to manage money? If parents are concerned about a child’s ability to manage money, a trust can be established to avoid squandering an inheritance. If an adult child is disabled, a “special needs trust” enables the child to receive assets while maintaining eligibility for government benefits such as Supplemental Security Income (SSI).
7. Share Information with Trusted People
Let several trusted people (e.g., spouses and adult children) know the location of the compiled list of beneficiary designations or share a copy with them. After all, it will not benefit anyone to compile this information if nobody knows that it exists. Not having beneficiary designation data readily available can result in needless expenses and/or time delays in the distribution of assets.
For additional information about beneficiary designations, review the Montana State University Extension fact sheet Designating Beneficiaries Through Contractual Arrangements.