The Importance of Beneficiaries and Where to Designate Them

By Brian Burgess, CFP® | Apr 30, 2021 |

When you think of estate planning, a last will and testament and medical and financial powers of attorney may come to mind. While those documents are essential building blocks of a complete estate plan, there’s a key step to take to make sure that your accounts are in good order today: designating a primary and contingent beneficiary for your retirement accounts.

Sequencing Considerations

Whether you’re early in your career, a long-time saver, or somewhere in between, setting and maintaining a beneficiary election on your retirement accounts helps ensure that your asset base aligns with your overall priorities. Without a beneficiary designation in place, the passage of any assets in your account is subject to the terms of elections made in your will (or in the case of a qualified retirement plan, the plan document). Otherwise, your estate would be subject to the probate process.

If you have no living heirs, the state could ultimately claim the assets through a process known as escheatment. While the latter example is less common, it is still important to know that the beneficiary elections on your retirement account take precedence over any elections in your will. Set a specific benefactor of your account(s) independent of the dispositive scheme of the rest of your assets.

Donor-Advised Funds

One technique t0 consider is setting a primary beneficiary (spouse, child, sibling, etc.), with the contingent beneficiary selected as a qualified 501(c)3 charity or donor-advised fund. Such a move allows you to assign the balance in the account to an entity that will manage the assets should you outlive your primary beneficiary.

Alternatively, you can set terms more broadly, electing a primary beneficiary and having funds pass to their heirs should they pass first. Ultimately, it comes down to your preferences and how you would like to manage your legacy.

Keeping Things Current

Revisit beneficiary elections at least once a year or whenever there is a significant life change. We recommend keeping a time on your calendar, such as tax filing season or the year-end holidays, when you revisit the elections on all of your accounts (retirement and otherwise) and make sure that they reflect your current circumstances. This is especially important in the event of separation or divorce, wherein a former family member or spouse may no longer be part of your plan.

If you have any questions about beneficiary elections or how to align your estate plan with your broader financial goals, please connect with our team.

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