Updating your beneficiary designations is an easy, yet often overlooked task. Many types of assets have beneficiary designations which allow for smooth transfer of those assets upon your death. Often times I see clients who initially completed a beneficiary designation when they took out their first life insurance policy or opened an IRA, but then never updated the designation as their life circumstances changed. Here are some tips to make sure your beneficiary designations are in order:
Annual review: Make it a practice to review the status of your beneficiary designations annually. Use your annual life insurance premium billing as a reminder to review your designations.
Marriage or Divorce: Adding or removing a spouse as the beneficiary of a policy or account should be done promptly upon a marriage or divorce. Additionally, many times a divorce settlement requires a spouse to maintain a life insurance policy and name children as the beneficiaries. It is important to comply with your divorce settlement as it relates to your life insurance policies.
Don’t name a guardian as beneficiary; use a trust: I occasionally run across situations where an individual names a guardian appointed by their will as beneficiary of a life insurance policy or retirement plan in hopes that the guardian will use that money to support the minor children in the event of the death of a parent. I strongly advise against this course of action. Clients in this situation should create a trust to receive the proceeds of life insurance policies so that the funds are guaranteed to be distributed to the beneficiaries in the manner and according to the timetable chosen by the parent of the minor child.
Beneficiary Designations on qualified accounts: Many clients have retirement assets such as a 401K or IRA that provide tax advantages to the client. When a client has young children, many times the client’s revocable living trust, rather than the minor children outright, is named as the contingent beneficiary of such assets (the spouse, if applicable, would be the primary beneficiary). While this is an appropriate choice when a client has young children, eventually when those children become adults, naming adult children as the outright contingent beneficiary is often a better choice. Clients should review their designations on their retirement assets with their attorney or tax professional every few years, especially when their children reach their twenties and thirties.