Individuals have the ability to designate beneficiaries directly on assets such as investments, annuities, insurance products, and registered plans. By choosing to handle assets in this manner, the proceeds of the assets go directly to the beneficiary (or beneficiaries) without going through the estate.
Benefits
Timeliness
Beneficiaries typically receive their proceeds earlier than those designated in the will.
Probate
These assets are typically not subject to probate tax.
Privacy
Beneficiaries are not mentioned in the will, which all inheritors have access to.
Contestability
These assets are more difficult to contest than a will, and contesting wills is becoming a more common practice all the time as families disagree over the contents and fight for what they believe should be rightfully theirs.
Creditor Protection
Designating beneficiaries on assets outside of the will helps protect the assets from creditors, allowing the beneficiaries to receive the entire amount of the assets instead.
Beware
There is a common misconception that going through a separation or divorce revokes beneficiary designations that were made in the past. This is not the case. You must specifically make a new beneficiary designation if you no longer want your former spouse to receive the proceeds of the asset after your death.
There have been an amazing number of instances over the years where the designated beneficiary had actually passed away prior to the deceased and were obviously unable to collect.
It is very common for individuals to neglect to update their beneficiary designations after changes in their family situation such as marriage or divorce. It is very easy to do.
The problem that arises is that the beneficiary designation is a legally binding document and actually supersedes your will. What does that mean? It means that it does not matter what your current relationship status is or what your will actually says, the asset will go to the person you last named as the beneficiary designation.
Beneficiary Designations Beat out the Will
Simply updating your will does not affect the beneficiary designations on your life insurance policy, annuity, or retirement account. The beneficiary designation takes precedence over the contents of the will. Therefore, it is important that you update your beneficiary designations to reflect your current wishes.
How to Review Beneficiary Designations
Make a spreadsheet listing each retirement account, life insurance policy, and annuity that you currently have. Add two columns to your list, one for the designated beneficiary and one for the date. It is a good idea to name a contingent beneficiary as well as the primary beneficiary. By doing so you have stated who the proceeds of the asset should go to if the primary beneficiary passes away.
Keep this list with all of your other important documents and get in the habit of pulling out the list on a yearly basis to confirm it still coincides with your wishes. Remember to add on any new policies as you acquire them. If you need to change a designated beneficiary then contact the appropriate company to get the needed paperwork.
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