Why Is It Important to Designate Beneficiaries?

Beneficiaries

Why Is It Important to Designate Beneficiaries?

Why Is It Important to Designate Beneficiaries? 2560 1696 AMA Team

Why Is It Important to Designate Beneficiaries?

When opening a savings/investment account – such as retirement, 401(k) or an IRA, an investment account and even life insurance – we’re usually asked to designate a beneficiary for the account in the event of our death.

At the time, this can seem like a quick, unimportant step in opening the account, but it’s a crucial decision in determining where your assets will go when you die.

So what is a beneficiary?

A beneficiary is an individual designated to receive a particular asset or investment in the event of your death. Generally, you designate beneficiaries in your will and for specific financial accounts. 

However, many don’t realise that the beneficiaries you name for each of your financial accounts are given precedence over the beneficiaries named in your will (even if you create your will after designating your account beneficiaries).

Why is it important to designate beneficiaries?

You should take the process of designating beneficiaries very seriously, both in your will and especially for your financial accounts.

1. To make inheriting quicker for your loved ones.

After our passing, the people in our lives have enough to deal with without having to wade through complex legal proceedings to receive the assets you intended for them.

More than being a thing of convenience, your loved ones often need to access the funds you leave them to pay for your funeral and other financial events brought about by your passing.

Not taking the time to ensure you’ve listed the right beneficiaries for your accounts – and that these align with the wishes stated in your will – puts your loved ones at risk of having to deal with the financial consequences of your death on their own and upfront.

2. To make sure the people you intend to receive your assets.

It’s essential to designate the correct beneficiaries for your financial accounts because they are given priority over those named in your will.

For example, if You state in your will that you want to bequeath all of your assets to your children, but certain financial accounts have another beneficiary listed, such as an ex-spouse – then it’s likely that the account will be passed on to the individual designated beneficiary for that account, even though your will stated otherwise.

Suppose an unclear situation such as this arises. In that case, the issue could be taken to the probate court, causing problems for the loved ones you left behind and potentially ending with your accounts being in different hands than you intended.

3. To ensure every eventuality is prepared for.

Another aspect of beneficiary designation is ensuring you have a secondary or ‘contingency’ beneficiary in place.

Designating a secondary beneficiary ensures that, if the primary beneficiary dies – or declines to accept the account for any reason – there’s someone else in place to receive the account.

This allows you to choose who receives the account in case one of the former two events happens, rather than passing it to your closest relative as decided by the law.

4. To protect your children.

If you have children who are minors – or perhaps they’re adults, but you’re not confident they can handle the responsibility of suddenly being given a significant amount of money – then you might want to designate a trust as a beneficiary.

To do so, you’ll typically name the trust and the name of the trustee; this will prevent the beneficiary from being given the whole account outright, which could happen automatically if you fail to write a will or designate a trust as the beneficiary on your chosen account.

It’s equally important to review and update your beneficiaries regularly.

Often, a great deal of time passes between the time we open our financial accounts and the time we die, especially as many of us open these accounts in our twenties and thirties.

From that time until we die, if we’re fortunate, many decades can pass. Subsequently, our lives – and the people in them – can change dramatically. 

After all, in that time, you may have kids or divorce and remarry, and you’ll need to change your beneficiaries accordingly.

As such, it’s essential to continually review the beneficiaries designated for each account to check that they’re still the people you want to receive this asset.

Remember: even if you write a will after designating the beneficiaries on your accounts, these beneficiaries may still receive the account regardless.

For this reason, financial advisors recommend reviewing the beneficiaries for each of your accounts each year if your situation changes – and it’s essential to update your will accordingly, too, to make the inheritance process as smooth as possible for your loved ones and to eliminate any confusion about what you wanted.

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