Beneficiary Designations in Estate Planning: Don’t Forget to Keep Them Updated

Estate planning, as many readers are aware, can quite complex, but it can also be very simple, depending on the needs and desires of each individual. Even in simple estate planning, though, there are various elements that need to be addressed and coordinated, and that includes beneficiary designations.

Beneficiary designations are selected in a number of documents, including retirement accounts, life insurance policies, and transfer on death accounts. Keeping beneficiary designations updated is an important part of any estate plan in order to ensure that, as circumstances change, plans for distribution of the proceeds of these accounts change accordingly. 

When no beneficiary designation is made, the proceeds of a life insurance policy or retirement account go the one’s estate, which can impact how quickly assets are available to be withdrawn. On the other hand, by making a beneficiary designation, one is able to avoid having those assets go through probate. The important thing, though, is to update these designations as one’s other estate planning documents change, otherwise the beneficiary will remain the same.

Updating beneficiary designations is particularly important when there are major changes in one’s life, such as the birth of a child, divorce, or the death of a beneficiary. There are other considerations that can come into play when naming beneficiaries, particularly with retirement accounts. In the case of IRAs, the length of time assets are allowed to grow on a tax-deferred basis is important to consider when naming beneficiaries.

There are other tax considerations to consider with beneficiary designations, such as estate and generation-skipping taxes, which we’ll look at in our next post.