6 Things to Consider Before Selecting Your Beneficiaries

The selection of beneficiaries constitutes a crucial aspect of the estate planning process and is a decision that should be made thoughtfully. Beneficiary designations afford you the opportunity to specify the individuals who will inherit your financial accounts and insurance benefits upon your passing. The choices you make can exert a profound influence on the lives of your loved ones; hence, it is imperative to comprehend the significance of beneficiary designations within the broader framework of your estate plan. In the following section, we offer some fundamental insights into beneficiaries and provide recommendations to aid you in making informed choices regarding your designations.

The significance of beneficiary designation.

Although beneficiary designations may appear deceptively straightforward, their importance should never be underestimated. Crafting a comprehensive estate plan demands dedication and attention to detail, with beneficiary designations being a substantial component of that process. While it may seem as straightforward as inscribing a person’s name when designating a beneficiary, the unintended selection of a beneficiary who does not align with your intentions has the potential to disrupt the careful planning you’ve undertaken in your estate. Thus, the significance of these designations should not be overlooked.

It’s essential to recognize that beneficiary designations hold precedence over any directives stipulated in your will. For instance, if you have designated Uncle John as the beneficiary of your IRA account, but your will states your preference for the account to be inherited by Aunt Susan, Uncle John will ultimately receive the assets after your passing, as he is the designated beneficiary on your account. Therefore, it is imperative not to commit the oversight of diligently crafting a will or trust tailored to your specific requirements, only to neglect the essential updates needed on your beneficiary designations.

Beneficiary designations are frequently neglected because they are typically established at the time of opening an account or purchasing a policy, and account or policy holders rarely receive reminders to periodically review and make essential updates over the years. Unfortunately, there is no centralized repository that consolidates all beneficiary designations, making it challenging to keep track of the assignments. It is crucial to emphasize that beneficiary designations should undergo regular reviews and must not be relegated to a “set it and forget it” item on your financial checklist.

Considerations when selecting your beneficiaries.

When making decisions about your beneficiaries, it’s vital to take the following into account.

1. Your estate planning goals

Your estate plan may necessitate periodic updates over the years, primarily due to shifts in your preferences, alterations in family dynamics, or modifications in estate planning laws. Given that beneficiary designations typically hold precedence over the directives in your will and trust, it is paramount to maintain consistency among all your beneficiaries, ensuring alignment with your other estate planning documents and long-term legacy objectives.

A practical approach to address this is to compile a comprehensive list of all accounts for which beneficiaries have been designated. Additionally, establish regular reminders to revisit and reassess these designations, particularly in the aftermath of significant life events such as marriage, divorce, the birth of a child, or the unfortunate passing of a designated beneficiary.

2. Minor children

Minors are typically not permitted to directly inherit financial accounts or life insurance proceeds. In such cases, if you designate a minor as your beneficiary, it may necessitate the involvement of the court to appoint a guardian responsible for overseeing the inherited assets. This process can be protracted and costly. As an alternative, rather than designating minor children as beneficiaries, it is advisable to consider designating a trust or a trusted adult who can manage your assets in the event of your passing, especially if you have minor children. This approach can help ensure a smoother and more efficient transition of assets while safeguarding the interests of your minor beneficiaries.

3. Special needs beneficiaries

When you intend to provide financial support to a loved one with special needs, the conventional approach of designating them as a beneficiary may inadvertently render them ineligible for crucial government assistance. In such circumstances, it can be more appropriate to create a special needs trust and designate the trust as the beneficiary. A special needs trust serves the purpose of enabling you to distribute assets to your loved one while preserving their eligibility for government assistance. Given the intricacies involved in this financial strategy, it is imperative to seek counsel from both your wealth manager and an estate planning attorney before proceeding with this approach.

4. Charitable giving goals

If your legacy goals involve contributing to charitable endeavors, you may contemplate designating a charity as your beneficiary. Depending on the precise aims you have in mind, there are two primary methods to contribute to charitable causes via your beneficiary designations. These approaches offer flexibility to align with your philanthropic objectives.

• Designate the charity as a primary beneficiary – You have the option to designate a charitable organization as the exclusive beneficiary of your estate or allocate a specific monetary value or a percentage of your assets to be directed towards the charitable cause, while directing the remaining portion to be distributed among your heirs.
• Create a donor-advised fund (DAF) and designate it as a beneficiary – A Donor-Advised Fund (DAF) represents a specialized financial account designed to earmark assets for prospective charitable contributions. By selecting a DAF as a beneficiary for your accounts, this fund can then disburse donations to charitable endeavors that align with your philanthropic interests. Appointing a successor for your DAF serves the purpose of safeguarding the perpetuation of your charitable mission well beyond your lifetime.

5. Family dynamics

Every family possesses its distinctive set of circumstances and interpersonal dynamics. It is plausible that you may have experienced divorce or estrangement from a cherished family member. Alternatively, you might have endured the loss of a child or embarked on a recent marriage. Irrespective of the precise circumstances, it is crucial to give due regard to family dynamics when determining beneficiaries. As family dynamics are subject to transformation over time, it is imperative to periodically reassess your designated beneficiaries to ascertain their congruence with your evolving desires in response to the fluctuations in your life and relationships.

6. Contingent beneficiaries

Beyond your primary beneficiaries, it is equally essential to select contingent beneficiaries. These individuals serve as an alternative choice in the event that one of your primary beneficiaries predeceases you. They stand as the subsequent candidates eligible to inherit your assets, thereby establishing a succession plan for the distribution of your estate.