I regularly urge readers to organize their estates and I’ve talked at length about including all assets in that planning, so I would be remiss not to mention an important piece of estate organization advice. Make a habit of periodically checking the beneficiary designations on your life insurance policies – as well as other financial accounts for which you may have beneficiaries. The reason for this is that these designations bypass your will. That means that the proceeds of the insurance are not controlled by your will but rather the beneficiary designation listed on your policy.
Remarriage is an example scenario. Let’s say during your first marriage you name your husband or wife the beneficiary of your life insurance policy. You put the policy aside and all but forget it exists. After all, you likely won’t need it for quite some time if at all — at least that’s the hope. You divorce and remarry, and as a conscientious spouse, you rewrite your will to include your current significant other. Despite the best of intentions, you missed a crucial step. Because you didn’t designate your new spouse the beneficiary on your insurance policy, death benefits land with your ex-husband or ex-wife. Likely you assumed your will would prevail, but the unfortunate result is your current spouse is left with nothing.
As I alluded to earlier, this scenario doesn’t apply to only life insurance policies. A range of financial products, such as annuities and retirement accounts, require beneficiaries, but for many financial assets, adding one is optional. For example, you can add a beneficiary to your bank account. They use the term Payable on Death (POD). The same goes for your brokerage account recipient, or a Transfer on Death (TOD). You might be thinking, “why designate a beneficiary on these accounts if it’s just more information I have to remember to update if a life change occurs?” It’s an advantage because naming a beneficiary is a way to avoid probate. If no beneficiaries are listed, nonretirement accounts simply default to your estate, which is subject to probate. The financial purgatory that is probate will prolong the process of settling the estate.
To avoid this, it’s best to name beneficiaries whenever possible. When selecting beneficiaries, you’ll want to choose an able-bodied adult. Steer clear of minors or disabled relatives; anyone who is unable to operate independently is a poor choice. You’ll also want to consider what benefits this person is receiving or will receive in the future as monies you leave to them could interfere with their eligibility for assistance programs like disability or Veterans Affairs. Once named, make a habit of periodically checking in on all of your assets and reviewing your beneficiary selections.
If you’ve set up a Legacy Shield account, your personal information directory will list every account you possess, so you’re not forced to wade through stacks of paper to locate your assets. You can also set annual reminders to revisit these accounts. Whatever method you follow, beware the beneficiary trump card and play it wisely.