• Keeping Provisions and Beneficiary Designations Up-to-Date

  • by Austin Quinn

Planning for the future is essential. Whether you’re planning for the next day or the next several years, preparations often make the difference between success and failure. This simple lesson is certainly no different for retirement and estate planning. There are several ways to manage your assets and pass on your belongings to loved ones; however, the process isn’t always simple or easy. Let’s take a closer look at beneficiary designations, provisions, and ways to keep them up-to-date.

What is a Beneficiary Designation?

Essentially, a beneficiary designation is a legal instrument that allows you to select a beneficiary or multiple beneficiaries to be the recipients of life insurance policies, bank accounts, IRAs, investment and brokerage accounts, 401(k) accounts, and other assets that you own. Because beneficiary designations are non-probate transfers, they will take effect immediately after death, override existing wills, and will not undergo many of the same bureaucratic processes as other methods.

Why is it Important to Update Your Beneficiary Designations?

Time brings change, and change can bring unforeseen problems. When laws and estate taxes change, this may cause some complications for your beneficiaries. For example, there have been cases where an owner of a retirement account divorced and remarried, but then neglected to update their beneficiary designations. This can lead to frustrating legal battles for surviving spouses and loved ones who must contend for a legal determination of who should be the true beneficiary.

Similar problems can occur when children are named as beneficiaries but their younger siblings, born after the initial document was signed, are not included. To prevent these kinds of situations, it’s usually a good idea to update beneficiary designations on occasion or immediately after changes in family status. Of course, families and individual people aren’t exempt from these types of issues. If you designate a charity or other organization as your beneficiary, that organization may no longer exist after several years — or decades — have passed.

Thankfully, you can also create customized “what-if” designations to address these types of issues. It’s also quite common to create provisions for simultaneous deaths. For instance, most couples, expecting that one of them will pass away before the other, will name each other as designated beneficiaries. However, if simultaneous death occurs, state laws will determine who technically died first. This may cause problems for beneficiaries down the line, including children from past marriages. Proper provisions can remove these problems and ensure that your wishes are met.

Other Types of Designations

When drafting customized beneficiary designations, you’ll have several options to choose from. According to Investopedia, the following two methods of designation are among the most common.

  • Per-Stirpes Designation – If your primary beneficiary passes away before you, a per-stirpes beneficiary designation stipulates that the share they would have received will go to their heirs instead. For instance, let’s say that you name your two children as primary beneficiaries. Should one of them pass away before you, that child’s share will go to their heirs instead.
  • Per-Capita Designation – This kind of designation will also designate your primary beneficiary’s heirs as fallback options. However, the difference lies in how your funds will be allocated. If your primary beneficiary passes away before you, their share will be distributed equally among their successors. For example, let’s say that you designate that one of your children will receive 60% of your assets whereas the other will receive 40%. If both children predecease you, their beneficiaries will receive an equal split of the assets under per-capita designation.

How to Put Your Plans into Actions

Speak with your existing estate planner or retirement account administrator. If you have multiple plans, such as a life insurance policy as well as an IRA, each beneficiary designation will need to be changed separately. When making changes to beneficiaries, make sure that you know identifying information about the beneficiary including their full name, date of birth, address, and other key details. As long as you update your beneficiary designations occasionally, you should be able to avoid major issues and protect your loved ones.