10 Beneficiary Designation Tips

Beneficiary designations can provide a relatively easy way to transfer an account or insurance benefit upon your death. However, if you’re not careful, missing, outdated, or inconsistent beneficiary designations can easily cause your estate plan to go awry.

We often complete these designations without giving it much thought, but they actually deserve careful attention. Here’s why: Beneficiary designations take priority over what’s in other estate planning documents, such as a will or trust.

1. Remember to name beneficiaries. If you don’t name a beneficiary when one is called for, one of the following could occur:

• The account or policy may have to go through probate. This process often results in unnecessary delays, additional costs, and unfavorable income tax treatment.
• The agreement that controls the account or policy may provide for “default” beneficiaries. This could be helpful, but it’s possible the default beneficiaries may not be whom you intended.

2. Name both primary and contingent beneficiaries. It’s a good practice to name a “back up” or contingent beneficiary in case the primary beneficiary dies before you. If there is only one individual that you want to leave the money to, consider whether a charity (or charities) would be appropriate as the contingent beneficiary.

3. Update for life events. Review your beneficiary designations regularly and update them as needed based on major life events, such as births, deaths, marriages, and divorces.

4. Read the instructions. Beneficiary designation forms are not all alike. Don’t just fill in names—be sure to read the form carefully.

5. Coordinate with your will and trust. Whenever you change your will or trust, be sure to talk with your attorney about your beneficiary designations. Because these designations operate independently of your other estate planning documents, it’s important to understand how the different parts of your plan work as a whole.

6. Think twice before naming individual beneficiaries for particular assets. For example, you establish three accounts of equal value and name a different child as beneficiary of each. Over the years, the accounts may grow unevenly, so the children end up getting different amounts—which may not be what you originally intended.

7. Avoid naming your estate as beneficiary. If you designate a beneficiary on your 401(k), for example, it won’t have to go through probate court to be distributed to the beneficiary. If you fail to name a beneficiary, or name your estate as beneficiary, the account will have to go through probate. For IRAs and employer-sponsored retirement plans, there may also be unfavorable income tax consequences.

8. Use caution when naming a trust as beneficiary of certain assets. Consult your attorney or CPA before naming a trust as beneficiary for IRAs, employer-sponsored retirement plans, or annuities. There are situations where it makes sense to name a trust—for example if:

• Your beneficiaries are minor children
• You’re in a second marriage
• You want a trustee, not the beneficiary, to control access to funds

Even in cases like these, a trust may get less favorable tax treatment. So be sure to understand the tax implications before you name a trust as a beneficiary.

9. Be aware of tax consequences. Many assets that transfer by beneficiary designation, such as IRAs, retirement plans, or annuities, have unique tax rules. It’s helpful to work with an experienced tax advisor who can help provide advice for your particular situation.

10. Use disclaimers when necessary — but be careful. Sometimes a beneficiary may want to decline (disclaim) assets on which they’re designated as beneficiary. Keep in mind disclaimers involve complex legal and tax issues and require careful consultation with your attorney and CPA.

Because you’re asked to designate beneficiaries on so many different accounts and insurance products, it can be difficult to keep up. However, it’s worth the effort; forgetting to review the beneficiary designation on that 401(k) from three employers ago could mean the account won’t go to the beneficiaries you intended.

When you first set up your estate plan, go over all the designations you previously made and align them with your plan. After that, you should review and update them regularly—once a year would be ideal. To help ensure nothing gets overlooked, put a reminder on your smartphone or computer and create a list of all your accounts and policies along with whom you’ve named as beneficiaries.

• When creating, updating, or simply reviewing your estate plan, pay attention to your beneficiary designations.
• Remember, beneficiary designations take precedence over what you may have specified in a will or trust.
• Put a reminder on your calendar to check your beneficiary designations annually so you can keep them up-to-date.

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Wells Fargo Advisors and its affiliates do not provide tax or legal advice. Please consult with your tax and/or legal advisors before taking any action that may have tax and/or legal consequences.

Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.