RIP: How to Ensure that Your Beneficiaries are Set in Stone

When preparing your last will and testament, I cannot stress enough the importance of making sure your beneficiary selections match up with your retirement plan choices. Sounds simple enough, but it may turn out to be the opposite if your estate holdings are at all complex. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Choosing Beneficiaries

First, select your beneficiaries - or review them - and what role they play in your life…and death. They’re the folks – or entities – that you (the benefactor) designate to receive the proceeds of your estate, including investment accounts, insurance policies, annuities, pensions, real estate holdings, etc. A primary beneficiary must survive the benefactor to receive assets after the benefactor’s death. A secondary (or contingent) beneficiary will inherit a benefactor’s assets if the benefactor has no surviving primary beneficiary. Simple enough, so far.

Designate Wisely

Your beneficiary options are determined by the types of accounts you own. Take, for example, retirement accounts. Beneficiary designations that you make on such accounts [generally] supercede any other instructions including those in your will. For example, if your will specifies that your spouse is your IRA beneficiary, but your IRA document designates your kids as your beneficiaries, the kids will inherit the IRA proceeds. If you’re married but fail to designate a beneficiary, your IRA assets will pass to your spouse. If you’re unmarried, the proceeds will pass to your estate.

What is an estate? It's the sum total of the benefactor’s assets and liabilities…his or her real and personal property. During probate – a court proceeding that validates a benefactor’s will and settles the estate – an executor assembles an inventory of those assets, pays off any liabilities and taxes, and distributes the remaining property to the benefactor’s designated heirs. Simple enough if a benefactor properly plans for his or her ultimate demise.

Per Stirpes

Beneficiaries' names often change over time, perhaps, no longer reflecting the intentions of the benefactor who failed to note those changes. To avoid such circumstances, a benefactor can consider designating beneficiaries by their relationships to him or her but must not forget to update status changes in case of marriage, divorce, or death.

To designate all of a benefactor’s children as beneficiaries, the benefactor can simply leave an item or account "to my descendants who survive me, per stirpes.” This avoids having to correct children's names as they marry or divorce.

The "to my descendants who survive me, per stirpes" designation divides the benefactor’s assets equally among all children of the benefactor who survive him or her. If any of the benefactor’s children pre-decease him or her, that child's children—the benefactor’s grandchildren—would equally share their deceased parent's share of the benefactor’s assets. If any of the benefactor’s children pre-decease him or her without children of their own, their shares would be divided among the benefactor’s surviving children. Stepchildren aren't included in the "to my descendants who survive me, per stirpes" designation. However, if the benefactor desires, stepchildren can certainly be added as named beneficiaries.

Retirement Accounts

Anyone can be an IRA beneficiary, a spouse, preferably by name in case of divorce or death, or "to my partner in marriage at the time of my death"; minor children and grandchildren individually named if the allocation among them is unequal; and even non-family members. By the way, names of beneficiaries listed on retirement accounts must match their legal names (no nicknames please).

If the benefactor has created a trust, it can be named a beneficiary, which might help avoid probate…but that’s another topic for another day. Charities or other organizations can be named beneficiaries based on specified allocations made to them by the benefactor. Joint accounts don't need beneficiaries - they simply pass to the surviving owner.

Non-Retirement Accounts

A benefactor’s spouse can be his or her beneficiary on any type of account. The naming of beneficiaries on non-retirement accounts depends on the choices a benefactor has already made in an estate plan as to the administration and disposition of property before and after the benefactor’s death. In short, non-retirement accounts may not need beneficiaries. But beneficiaries selected for a retirement account won't carry over to non-retirement accounts, or vice versa.

Payable on Death

A Payable On Death (POD) account, often called a “poor man’s trust,” is occasionally (but not necessarily) used to ensure that funds are readily available for end-of-life expenses such as funeral services and payment of final bills or taxes. The primary benefit of naming a beneficiary as POD of a benefactor’s checking, savings, or money market account is that said beneficiary is able to claim funds in such accounts without probate and without delay...usually before probate is complete.

Additional POD benefits include being able to change or cancel beneficiaries as often as the benefactor desires without the help and expense of legal counsel. By the way, the benefactor can spend all the money in a POD account prior to death if he or she so chooses. To receive the POD funds, the beneficiary simply provides a death certificate and identification to the financial institution. A POD account is very similar to a Transfer On Death (TOD) arrangement that sometimes deals with a benefactor’s stocks, bonds, mutual funds or other non-retirement investment assets.

Joint Accounts

Accounts with two or more owners don’t need beneficiaries. They simply pass ownership to the surviving owners.

In Sum

The subject matter involving beneficiaries is not without its potential complications. The more complex a given estate, the more important the proper designation of beneficiaries becomes…and the more important it might be to seek legal advice. Anyone who has served as the executor of even a relatively simple estate will likely recommend the guidance of a good lawyer!