Your estate planning—that part naming whom you want to have things after you die—involves more than your will. You should also select whom you want to receive various accounts you have. These accounts can be given directly to those persons you name—the beneficiaries—without any need for probate or court oversight. Thus, any time you consider your estate plan (or during any major life change), you should also review those beneficiary choices and make sure they continue to reflect your wishes. Four primary accounts that need beneficiaries are life insurance policies; retirement accounts; accounts set up as pay on death; and health savings accounts.
When you buy a life insurance policy, you’ll name a beneficiary. Hopefully, your agent will also encourage you to name a contingent beneficiary, that is, someone who will be the beneficiary if the initial person or persons you named die before you. But what about your policy at work? Often employers provide a basic life insurance benefit for employees. Have you kept that designation updated with your Human Resources department? Has your life changed since then?
In addition to providing life insurance, many employers provide retirement savings opportunities to their employees. For self-funded plans (or employee-matched contributions), you might, for example, have a 401(k) or similar type of plan. When you started work with your employer, if you filled out paperwork for a 401(k), you likely selected a beneficiary. This means those funds pass to your beneficiary without the oversight of a probate court. But did you Or might you have thought you’d come back and fill that in later? If you did, have you kept that designation up to date? Has your life situation changed since then?
Other types of retirement savings might also have a designated beneficiary. IRAs, Roth IRAs, and other retirement savings you rolled over from a prior plan should have a named beneficiary. Annuities and pension plans often have their own rules. Further, some laws dictate whether you may name a nonspouse as a beneficiary for different types of plans. And not always is all of the account available to pass to a beneficiary. Working with a financial advisor and estate planning attorney can help you sort through these issues.
A pay on death account is not technically an account with a beneficiary. But in Florida, you can set your bank account up to automatically transfer to a selected person upon your death. This happens without the need for any probate proceedings or even a personal representative. For individuals with few assets, setting up an account this way can often avoid any need for probate whatsoever.
Still hanging onto the U.S. Savings Bonds your grandparents gave you (or maybe your portfolio is that diverse)? Those bonds can have a beneficiary designation too in this form. This is done by naming the person to whom the bond will pay on the death of the owner.
More and more people are opting for high deductible insurance plans and putting money into a health savings account, also known as an HSA. A benefit of these accounts is that they, like many retirement accounts, grow tax-deferred if the balance is left in the account until retirement age. (The balance in these accounts can roll over year-to-year and accumulate.) Before retirement, the funds are available for qualified medical expenses without being taxed. These accounts also usually have a designated beneficiary.
If you forget to select a beneficiary or if your beneficiary (or pay on death person) dies before you do, then the funds in question become part of your estate. The funds then, in turn, are distributed according to the terms of your will. If you don’t have a will, then the laws of your state decide to whom the balance is given. Thus, it is imperative to keep these designations current to be sure your plan is carried out how you want.
Your team of professionals—your estate planning attorney, your financial advisor, your insurance agent—should work in concert to help you have a full picture of how these pieces work together. It’s especially important to work with your attorney if you want to leave some of these above accounts to a trust; naming the beneficiary correctly on the account forms is essential.
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