Annual Checkup Time: Beneficiary Review

Who gets your financial assets when you die?  When you open a retirement account (such as a 401(k) or IRA), purchase life insurance or annuities, or sign up for a Health Savings Account, you are asked to name a beneficiary to receive the proceeds should you pass away. Many people fill out the forms and move on, over time forgetting who is named on which account. However, your family circumstances may change over the years.  Life events like marriage, divorce, death and birth of children and grandchildren can greatly alter who you want to receive these assets. Additionally, some family members who are named as beneficiaries may develop substance abuse issues, have special needs, become estranged from the family, or have spendthrift tendencies and credit problems.  In such cases beneficiary updates and alternate methods of inheritance (such as trusts) should be considered.

But I have a will…Your beneficiary designations take precedence over your will and pass to your beneficiaries by operation of law. So even if you keep your will and other estate-planning documents up to date, your best efforts can be undone if your retirement accounts go to a beneficiary named long ago (think your ex-husband!). As part of a periodic review of your finances, it is vitally important to review all your beneficiary designations to see if they need to be updated and to make sure that your final wishes are coordinated.

What about my taxable account? Although individual non-qualified accounts do not use a standard beneficiary form, assets can pass directly to beneficiaries by adding a transfer on death (TOD) designation. Banks and brokerages (like Schwab) offer this type of account registration at no charge.  The transfer of assets is quick and easy, and probate is avoided.  Unlike an outright gift, you retain full control over the account and the named beneficiary can be changed at any time before death. Joint tenants with survivorship (known as JTWROS) are commonly used for married couples to facilitate the transfer of assets– in the event of the death of one partner, the other receives all the assets without probating the account.

Can I name multiple beneficiaries? Yes! When splitting assets among several beneficiaries (such as your children), you have a choice of either a per capita or per stirpes distribution.  With a per capita distribution, the share of any beneficiary that precedes you in death is shared equally among the remaining beneficiaries.  Assume you have 3 children who each are listed as 1/3 beneficiaries.  If one of your children dies in a per capita distribution, the asset will be split 50/50 between the remaining two.  By contrast, in a per stirpes distribution, if a beneficiary precedes you in death, the benefits will pass on to that person’s children in equal parts.  Assume you have two children who are each 50% beneficiaries.  If one of them dies in a per stirpes distribution, the decedent’s share would pass to their children and the other remaining beneficiary would receive 50%.


If I do nothing, what will happen? Normally, when a person who passes away does not specify their beneficiaries or if their beneficiaries have predeceased them, the account will become part of the estate and follow the distribution outlined in the will.  If there is no will, then the assets will be distributed according to intestate succession laws. In general, this means the assets will pass to the surviving spouse and any children. However, this may not be the person or persons you wish to receive it. Unmarried partners, friends, and charities would get nothing under an intestate scenario. Furthermore, failure to name beneficiaries and have the proper estate documents will delay the processing of the estate and add considerably to probate costs.

Bottom Line: Keeping your beneficiary designations current is an important part of your family’s future well-being. We recommend keeping a list of your accounts that have beneficiary designations and attaching a copy to your will.  Check your beneficiary designations annually to make sure they are what you intend them to be. Most importantly, when you get married, divorced, have children, or make significant life changes, you want to check and update your estate documents. We strongly recommend naming both primary and contingent beneficiaries.  Contingent beneficiaries will inherit the assets if the primary beneficiaries predecease you- a strong consideration for the typical husband and wife who name each other.  Your CERTIFIED FINANCIAL PLANNER™ should be able to help you understand and implement the best strategy to meet your objectives.