Beneficiaries - Plan for Passing On

Beneficiaries are the primary focus of your last will and testament and/or trusts set up in their behalf. These are the people or groups (such as a charitable organization) you choose to inherit part or all of your estate after your death

Make sure you have enough assets to cover each beneficiary’s gift set forth in your will or trust, since you need to account for estate taxes, creditors, fees, and other expenses of settling your estate. This is another place where a professional can help.

Adult beneficiaries can also be named as executors and/or trustees, but shouldn’t sign as witnesses of the documents.

You may see the term heir used interchangeably, but technically only family members who inherit from you if you die without a will (intestate) are heirs.

You can list the name of a beneficiary, but you can assign a designation that may account for some changes over time, such as “to the person I’m married to at the time of my death” and “to my descendants who survive me”.

When you are creating your estate plan it is crucial to carefully consider your beneficiary choices, the assets they inherit, and how they may handle them, and the overall effect on their lives and on other beneficiaries. Not naming beneficiaries is similar to dying without a will; the probate court has the final say on how the assets are distributed. The same is true if the beneficiary choices are invalid because the forms are improperly filled out.

Create a comprehensive list of all assets you leave to each beneficiary in your will, along with a detailed distribution plan, including percentages for any assets with multiple beneficiaries.

Use the same list if you are planning individual trusts for each beneficiary.

Consider any contingencies or restrictions you wish to place on assets going to each individual.

Make sure you account for all or your assets to prevent bickering for those assets not listed.

In some states you can also use a Beneficiary Designation Form to provide more detail. You should make sure all beneficiary forms and others are filled out correctly.

Although they are not included in a will, beneficiaries can also be named for many other assets, such as a life insurance policy, a bank or brokerage account, securities or annuities accounts, retirement accounts (IRA and 401k), or other transfer on death accounts. In some states, a beneficiary may also be designated for motor vehicles and real estate.

Be aware of restrictions that may exist on your beneficiary choice for each asset, for example:

retirement plans, accounts, insurance policies, or trusts may be restricted to family
you may need written consent from your spouse to designate a different beneficiary for some types of accounts, such as IRAs and 401(k)s.
beneficiaries cannot be changed on an irrevocable trust
spouses can add your retirement plan into theirs without tax consequences, but not your children or other beneficiaries.

If you have or create a living trust, you could also name the trust as the beneficiary, although this may have tax consequences if you do it with a qualified account, such as IRA or 401k.

You can choose alternate/backup/contingent beneficiaries in the event something happens to one of your primary choices, designate multiple primary or contingent beneficiaries for the same asset, or provide details on how your assets would be distributed to the remaining beneficiaries.

You may even choose a “residuary beneficiary” to inherit anything not accounted for in your will or estate plan. Examples of assets this would be helpful for include:

everything left in the estate after any specific gifts included in your will have been distributed, all non-probate property has been distributed, and paying debts, taxes, and final expenses. This may simplify your will if you only have a few specific gifts in mind.

any benefits that would previously have gone to your divorced spouse or deceased beneficiary

Make sure you notify your beneficiaries, both primary or contingent, so they are aware they are to receive inheritance upon their death, or upon the death of a primary beneficiary.

It is crucial to keep your will, documents, and trusts updated with any changes in beneficiaries, such as a birth, adoption, death, or divorce.

Although your ex spouse may be legally removed from your will after the divorce is official, you will need to alter the distribution of your assets to account for this to avoid involvement of the probate court in this decision.

They will also need to be removed as beneficiaries from trusts and other assets.

Even though a death may be covered by a contingent beneficiary, you should name a new alternate.

Although you could designate beneficiaries as “my descendants who survive me” to account for the birth or death of a child, it would not account for adoptions.

It is better to add all new children and remove deceased children, even if you designate that all assets will be divided equally among your surviving children.

Beneficiaries can be changed at any time, except for those named in an irrevocable trust, which requires legal proceedings. You should also make sure these updates are done correctly and do not contradict each other. For example, most transferable on-death assets automatically go to the named beneficiary and are no longer part of your estate after you die.

Since the asset is not included in your will it won’t be distributed to the beneficiaries named there.

Obviously this is not a problem if they are the same person, but you may have assets that have been yours for decades for which you never updated the beneficiary.

So, if the life insurance policy you took out years ago, before you met your spouse, still names your brother as the beneficiary, he will get the money after your death, despite the fact that you designated that your spouse would get everything.