Beneficiaries 101

Wealth

It’s important to periodically review the beneficiaries named on financial assets including your life insurance policy, IRA, or 401(k). Review your financial portfolio and update your beneficiary information as needed to be sure that your heirs receive the assets you intend for them to receive in a timely manner.

What is a Beneficiary?

A beneficiary is the person or entity you legally designate to receive the funds in a financial product such as an Individual Retirement Account (IRA) or 401(k) account, or the proceeds of a life insurance policy after you pass away. Unlike other types of property, some financial products including retirement accounts and life insurance policies pass directly to the beneficiaries listed on each account and are not governed by a will.

Naming one or more beneficiaries can minimize hassles and delays in distributing funds after your death. In general, a beneficiary can be:

  • One or more persons
  • A trust
  • A charity
  • Your estate

If you don’t name a beneficiary, or if the beneficiaries you designated are no longer living when you pass away, funds from the account or the policy would be paid to your estate or held in probate. Probate is a legal process where the court sorts out the financial situation and determines how to distribute assets. The probate process can delay distribution of the funds and probate costs can reduce the amount available to your heirs.

A financial planner can help you with your retirement goals and provide one-on-one guidance to help you build a plan to reach your goals and provide for your heirs.

Types of Beneficiaries

There are two types of beneficiaries – primary and contingent.

A primary beneficiary is the person or entity first in line to receive the financial account balance or life insurance policy proceeds after you pass away. This is usually your spouse, children, or other family members. Some states require that a spouse be named as primary beneficiary.

If you want to be sure your account balance or insurance benefit goes to who you want with minimal hassle and tax liability, there must be a primary beneficiary. You may be able to name more than one primary beneficiary as long as the percentages assigned add up to 100%.

A contingent (secondary) beneficiary is the person or entity named to receive the account balance or death benefit if there are no surviving primary beneficiaries. There can be more than one contingent beneficiary as long as the percentages assigned add up to 100%.

If neither the primary nor the contingent beneficiary can be found after your death, the funds could be held in probate. When the funds become part of your estate, there could be legal complications, limited distribution options, and tax consequences on distributions.

A financial planner or estate planner can help you structure your beneficiaries based on your overall financial situation and factors specific to your family.

Things to Consider

There are circumstances where an inheritance could result in special handling of the funds or lead to legal and tax consequences for beneficiaries.

  • Minor as a beneficiary – Generally, insurance companies, pension plans, and retirement accounts will not transfer assets directly to minors (under age 18) until a trustee or guardian is approved by a court to look after the funds.
  • Lifelong dependent as beneficiary – Naming a lifelong dependent, such as a child with special needs, as beneficiary could disqualify them for government benefits under federal law. There are specific trusts that can preserve the ability of a beneficiary with special needs to continue to receive government benefits.

If your beneficiaries are minors or persons with special needs, consult with a tax attorney, estate planner, or financial professional for guidance.

Be Specific

Beneficiaries should be identified clearly and thoroughly with full legal names, social security numbers, and the person’s relationship to you (spouse, child, mother, father, etc.). This can make it easier and faster for the life insurance company, retirement plan, or investment account to locate your beneficiaries and pay them the policy benefits or account balance.

Besides naming beneficiaries, indicate how benefits are to be handled in the event one or more beneficiaries are no longer living. For example, if two children are named as beneficiaries but one passes away before you, do you want your surviving child to receive the entire benefit, or do you want the deceased child’s heirs to receive that child’s share?

Keep Beneficiaries Updated

Keep your beneficiary information up to date. The people or entities named on the beneficiary designation when you pass away are the ones who will receive the money upon your death. A beneficiary designation can’t be corrected or changed after your death.

It is a good idea to review your beneficiary designations and your financial goals after major life events including marriage, divorce, birth of children or grandchildren, job changes, retirement, or loss of a spouse.

Life changes could alter your intent but failing to update your beneficiary designations might result in a former spouse receiving the benefit instead of your current spouse, or children or grandchildren born after the beneficiaries were designated being excluded from a share of the benefit even if that wasn’t your intention. If your named beneficiaries pre-decease you and new ones aren’t designated, the policy proceeds or account balance could end up in probate.

As you plan ahead for retirement and respond to other major life events, Enterprise Wealth Management is here for you. Let us help you and your loved ones as you prepare for the future.

 

Debbie Avery, MBA

Senior Financial Advisor, Senior Vice President

Debbie.Avery@ebtc.com

978-596-2334

Enterprise Wealth Management is a division of Enterprise Bank providing comprehensive wealth management, including investment management, financial planning, trust and advisory services to individual and institutional clients.

Investment and Insurance products are not a Deposit, not FDIC Insured, not guaranteed by Enterprise Bank, not Insured by any government agency, and may lose value.

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