Having outdated beneficiary designations can create challenges regarding who should inherit your assets. It’s always best to plan your estate so all the documents match. Property owners must adjust the beneficiaries on their accounts whenever the legal relations with the named person change. Also, you can update your beneficiary when you make a will with different named heirs. The essence is to ensure your intentions reflect the information on the various documents for a smooth transition.
What Is a Beneficiary?
A beneficiary is a person designated to receive another person’s assets as an inheritance or gift. For example, a parent can name their child as a beneficiary in their estate plan so that the child will inherit the property when the parent passes away.
The beneficiary can be a natural person or legal entity like a charity or a trust. The same applies to the property owner. The assets could be anything of value that can be owned, such as land, money, jewelry, intellectual property and vehicles.
When naming a beneficiary, the property owner may make specific stipulations in the document. For example, they may include a condition that the beneficiary should only receive the asset after a certain age or period or when they do certain things. The property owner can instruct that multiple heirs should inherit the property. Generally, those stipulations are binding and should be respected.
When Do You Designate Beneficiaries?
You may designate a beneficiary when creating any of the following:
- Will: A person’s last will and testament is a document that contains the person’s wishes and instructions on how their assets should be distributed when they pass away. It’s an effective tool used to create a succession plan.
- Life insurance policy: A life insurance policy is a contract between a policyholder and an insurance company that requires the insurance company to pay a sum of money to particular named beneficiaries when the policyholder passes away. The policyholder pays insurance premiums during their lifetime.
- Living trust: A living trust is a legal arrangement where a property owner gives a trustee assets to hold on behalf of another person. The trustee can be an individual or legal entity. Unlike wills, a trust can take effect during the property owner’s lifetime.
- Bank account: Banks and other financial institutions usually let account holders name beneficiaries to inherit the money in the account when the account holder dies.
- Investment account: Like bank accounts, a person can designate beneficiaries for their investment accounts.
- Retirement account: When making a retirement plan like 403(b), 401(k) or individual retirement account (IRA) contributions, you can name a person to inherit the proceeds in the event of death. The person named is called the beneficiary.
Why You Should Keep Your Beneficiaries Up to Date
Here are four reasons why you should update your beneficiaries:
1. Your Heirs Can Change
Legal relationships can change over time. A property owner may survive the beneficiary or get married after naming a person as their successor. In these instances, updating your beneficiary can make things clear for everyone involved. Let’s consider some examples in detail:
- Death of beneficiary: There are several instances where the property owner survives the beneficiary. When that happens, updating the beneficiary is best to avoid confusion.
- Marriage: Adding your spouse or children to your list of beneficiaries allows them to inherit from your estate. That way, you’re sure they’ll be taken care of.
- Divorce: You may remove your ex-spouse as a beneficiary, especially if you remarry. Sometimes, a divorce automatically disqualifies your ex-spouse from being a beneficiary.
2. Beneficiary Designations Supersede Legal Will
Your beneficiary designations may supersede the directions you give in your will. So even if you write a valid will, the person listed as your beneficiary on your accounts may inherit your estate. Things can get further complicated when you survive the beneficiaries on the account.
Here is an example. Assuming you create an investment account and name your parents as your beneficiaries. Many years later, you get married and your parents pass away. In your will, you name your wife and kids as beneficiaries but forget to update your investment account. In this case, there are no clear beneficiaries to inherit your property. Updating your beneficiaries brings certainty.
3. Simplify Probate Processes
Updating your beneficiaries can simplify probate processes. Imagine having a will that matches the beneficiaries on your accounts. That can eliminate the confusion on inheritance, saving your family from months or years of litigation. Having a peaceful and smooth transition also eliminates costs, time-wasting and effort.
4. Ensure Financial Security for Loved Ones
One essential thing you can leave behind for your loved ones is financial security. That’s why property owners use different tools to transfer assets to their family and friends. As we’ve discussed, the challenge is that having conflicting estate plans can do more harm than good.
Updating your beneficiaries turns your intentions into reality. It enables you to give assets to those you intended, allowing them to live comfortably.
Beneficiary Update FAQs
Here are the answers to some frequently asked questions:
1. Does a Will Supersede a Life Insurance Beneficiary?
Beneficiaries under a life insurance policy typically have the right to claim the insurance payout, even when there is a valid will. The best way to declare your intentions is by updating your life insurance beneficiary to match your will or creating a contingent beneficiary on the insurance policy if the primary beneficiary is unwilling or unable to accept the payout.
There may be instances when a will can change the life insurance beneficiary. An example is when the beneficiary predeceases the property owner. The payout forms part of the estate and may be distributed according to the terms of the will.
The life insurance company usually pays the beneficiary almost immediately when they confirm death. On the other hand, getting the proceeds of a will can take time, especially when a dispute arises.
2. How Often Should You Update the Beneficiary?
You may update your beneficiaries whenever you decide someone else should inherit your property. For example, if your legal relationship with the heir changes, that may be an excellent time to make alterations. There is no specific time frame, as the circumstances will determine.
3. Can You Change Your Beneficiary at Any Time?
Generally, you may change your beneficiary at any time before death. The vital thing is to go through the correct process to ensure the change is effective. For example, if your life insurance policy requires you to satisfy certain conditions before changing the named beneficiaries, it’s best to comply with those requirements.
Contact Joseph A. Lucchese Funeral Home for a Smooth Transition
Joseph A. Lucchese Funeral Home offers unique funeral services in the Bronx. We aim to help you create a peaceful and memorable closing chapter for your loved ones according to your specifications. Learn more about our services today, or contact us with any questions. We’re ready to help you through these challenging times!
