Grant Reeves | May 1, 2024
The Importance of Naming Beneficiaries on Financial Accounts
When it comes to managing financial accounts and investments, naming beneficiaries is an important and often overlooked step that can have significant implications for estate planning and asset distribution. Designating beneficiaries ensures that your assets are passed on efficiently and according to your wishes, avoiding potential complications and delays. Beneficiary designations can give the following benefits:
Avoiding Probate: Assets with designated beneficiaries typically bypass the probate process, allowing for faster distribution to heirs. This can save time and money by avoiding court fees and delays.
Privacy: Probate proceedings are public record and an inventory of assets may be accessible, whereas beneficiary designations remain private. Naming beneficiaries helps maintain confidentiality regarding your financial affairs.
Flexibility: Beneficiary designations are generally easy to update or change as life circumstances evolve. This flexibility allows you to keep your estate plan current and aligned with your intentions.
Tax Benefits for Qualified Accounts: Certain qualified accounts, such as many retirement accounts, benefit from extended drawdown periods of up to ten years if they are passed via beneficiary designations. If these are instead passed to heirs by other means (such a last will and testament), taxation may be accelerated or even immediate.
Words of Caution
While naming beneficiaries is advantageous, care should be taken to ensure that it is done correctly. It may just seem like a quick little box to check off on your account application form, but it can cause complications.
For instance, some individuals may consider adding someone as a joint owner to accounts or property as an alternative. They may even name someone as a joint owner inadvertently if they do not understand the process or use the wrong form. However, this approach can introduce complications and unintended consequences that do not arise under a beneficiary designation such as:
Loss of Control: Adding a joint owner means they have immediate rights to the account or property. This can limit your ability to manage or dispose of the asset as you see fit and may entire the joint owner to immediately use the funds for their own benefit.
Creditors and Liabilities: A joint owner's creditors may have claims against the shared asset, potentially putting your assets at risk.
Estate Planning Complications: Joint ownership does not necessarily align with your overall estate planning goals and may conflict with the distribution outlined in your will or trust. In many cases a joint owner will inherit an asset outright upon your passing. This could mean that the wrong person or people end up inheriting an asset, leaving out other heirs and giving them little recourse to attempt to recover their intended inheritance.
Another common practice that may have unintended consequences is the direct naming of a minor as a beneficiary. While it is certainly understandable to want to leave support for a minor, particularly a child or grandchild, naming them as the direct beneficiary could lead to the minor child inheriting property directly in his/her own name. Generally, small children should not be directly in control of significant funds. This can be avoided by working with a legal professional to set up a trust or custodial arrangement for a minor and properly naming that trust or custodian as part of the beneficiary designation.
Finally, if you have family changes, particularly a divorce, make sure to review all of your beneficiary designations. State laws in many states remove an ex-spouse from estate planning documents, but those laws may not apply to beneficiary designations. It is possible for an ex-spouse to erroneously inherit life insurance or assets based on an outdated beneficiary designation.
Summary
In summary, the naming of beneficiaries on accounts can be a smart move, but care should be taken to make sure they are named correctly.
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Grant Reeves is an attorney with Barada Law Offices and a financial advisor with coreVISION Financial Group. The concepts discussed are for informational purposes only. Consult with your own counsel for legal advice specific to your own situation.