Trusts & Estates
March 27, 2023
Four Key Considerations for Beneficiary Designations
Beneficiary designations are among the most important legacy decisions you will make. A variety of financial accounts, including retirement plans and life insurance policies, allow you to designate beneficiaries. The person or persons named on an account’s beneficiary designation form will receive those assets after you die — even if your Will or revocable trust has different instructions.
Beneficiary designation forms are frequently executed without professional oversight. People typically fill them out when they enroll in a 401(k) plan, purchase a life insurance policy or, in some cases, establish a new bank or brokerage account. These forms are easy to file away and forget, but failure to update beneficiary designations after major life events can have serious financial and emotional consequences for your loved ones.
Every estate planning attorney has a horror story about telling a client’s family that an unintended beneficiary will receive the decedent’s assets because the beneficiary designation forms were not revisited and updated. You can avoid causing unnecessary pain and heartache for your loved ones — and ensure your wishes are honored — by giving careful thought to your initial designations, revisiting them regularly and updating them as necessary over the course of your life.
Beneficiary designations are powerful tools. They can keep certain assets out of your probate estate, which is subject to filing fees, creditor claims and potential disputes over Wills. Depending on the asset, your designations can provide an initial source of liquidity for named beneficiaries until your estate is settled and fully distributed.
Four Key Considerations for Beneficiary Designations
1. Carefully designate a primary and contingent beneficiary where needed
You will designate a beneficiary when purchasing an annuity or insurance policy, or starting or rolling over a qualified retirement account or IRA. Most married people name their spouse as their primary beneficiary. If, however, you and your spouse were to die at the same time, the assets will revert to your probate estate unless you have named one or more contingent beneficiaries. Adult children, trusts for the benefit of minors, other adult family members or charities are common choices for contingent beneficiaries.
Investment accounts and banking accounts are not required to have a beneficiary designation as your Will controls the disposition of those assets. If you have a Will, a beneficiary designation for an investment or bank account will often inadvertently change the disposition of your assets as was intended in your Will. Therefore, before designating a beneficiary on these types of accounts simply to avoid probate, please engage with your estate planning attorney to coordinate with the provisions of your Will.
2. Coordinate beneficiary designations with your Will and estate plan
Since beneficiary designations supersede anything in your Will or revocable trust, synchronize language across all instruments to avoid confusion and ensure your intentions are consistent and clear. A good rule of thumb is to review your current beneficiary designations whenever you or your advisors make a change to your estate plan. We encourage professional guidance when preparing your beneficiary designations.
3. Keep all beneficiary designations up to date
Changes in your life — and the lives of your primary and contingent beneficiaries — might make you reconsider who should inherit certain assets. Good reasons to review and possibly update your beneficiary designations include marriages; births or adoptions; children or grandchildren attaining their majority; divorces; a new job or business venture; retirement; disabilities, serious illnesses or deaths in the family; and changes in domicile. It is ideal to review your beneficiary designations annually even if none of these changes occurs. For Glenmede clients, your annual Goals-Based Wealth Review is a great time to reassess whether your beneficiary designations still align with your wishes. It is also worth considering whether new tax laws or changes in a designated beneficiary’s circumstances might trigger burdensome financial consequences for them, and adjust accordingly.
4. Store beneficiary designations with your important papers
Keep a copy of all designated beneficiary forms with your other important papers and make sure your estate planning attorney has current copies. Verify that retirement plan administrators, policy issuers and other financial institutions have up-to-date copies of relevant beneficiary designation forms. Finally, be sure the person you designate as your executor or personal representative knows where you store all your important papers, including your beneficiary designations.
Beneficiary designations allow you to direct who receives certain assets upon your death. They offer several advantages to you and your beneficiaries but need to be thoughtfully executed and regularly reviewed to avoid common pitfalls. If you have questions about making beneficiary designations that support your overall legacy objectives, please contact your Glenmede Relationship Manager or visit us at glenmede.com.
This material provides information of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. Any opinions, recommendations, expectations and/or projections expressed herein may change after the date of publication. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss any matter discussed herein with their tax advisor, attorney or Glenmede Relationship Manager.