When people think about estate planning and what will happen to their assets after they’re gone, they often only worry about a will — overlooking the crucial role that their financial accounts play in this process.
Why you need to update the beneficiaries on your financial assets
Many Americans have most of their assets tied up in various types of financial accounts — like a 401(k), life insurance policy or other retirement accounts — and these are the assets that they will leave behind to loved ones someday.
The problem is that many people just assume these assets will be left to the beneficiaries named in their will — but that isn’t necessarily true.
The beneficiaries named on your financial accounts will actually override beneficiaries named in your will. So if person 1 is listed on your will and person 2 is listed on your IRA or other financial account, person 2 will get to claim that account (and the funds in it).
Plus, different financial accounts have different rules regarding beneficiaries. For example, some automatically designate your spouse as the beneficiary, unless you update it to go to someone else. On the other hand, some accounts do not automatically go to your spouse, unless you’ve designated them as the beneficiary — so if no one is named, the fate of your account could be left up to some set of default rules.
Bottom line: If you want to decide how your assets are passed on, you need to update this information for each individual account.
You could end up leaving everything to your ex
You’ve worked hard to build your wealth, so it’s important that you get to decide where it will go after you’re gone.
Many people designate the beneficiaries on their financial accounts at the point when they’re set up — but if that was a long time ago, think about all the things that could’ve changed since then. Maybe you got divorced or had children. If you don’t update your beneficiary information, your ex would end up with all of your assets — as he/she would supersede the people named in your will.
Here are some life changes that may prompt a beneficiary update:
- Marriage or divorce
- Birth of a child or grandchild
- Death of a beneficiary
- Beneficiary reaches legal age to inherit
Read more: Cheapeast and easiest ways to do a will
Don’t leave your inheritance up to chance
Even if you don’t have an estranged ex you want to avoid leaving your wealth to, it’s still important that you update your beneficiary information regularly. This will allow you to ensure how your assets are passed on and will also make the process easier for loved ones who will eventually inherit them.
For example, if your estate is left to be divided among your heirs, someone will have to manage that process when the time comes — and there could be fees associated with that. Who will be responsible for this and how will that process be managed? A trusted family advisor or lawyer can help ensure a successful wealth transfer. The bottom line is to make sure you are leaving nothing up to chance when it comes to your inheritance.
Read more: The dangers of grandparents owning 529 plans
It’s also important to look into the benefits of certain beneficiary decisions. For example, leaving an IRA to a grandchild rather than a child would allow that money to grow tax-free for longer, since a grandchild wouldn’t be required to make withdrawals until age 70 1/2. Check out the AARP’s website for more information.
Here are some accounts that may allow you to designate beneficiaries:
- Retirement accounts: 401(k), IRA etc.
- 529 plans (college savings plans)
- Life insurance
- Annuities with a death benefit
- Corporate profit-sharing plans
- Pension plans
- CDs, checking accounts or other bank accounts
- Stocks, bonds or mutual funds