Preparing for your legacy can be logistically and emotionally stressful, but overlooking beneficiary planning can create serious problems: your assets may not go to the people you intended.
Mallory Kretman, CFP®, Wealth Manager at Laurel Wealth Planning, shares, “Many people assume their will controls how everything is distributed after their death. But in actuality, beneficiary designations on accounts like retirement plans and life insurance policies generally take priority. If those designations are outdated or incomplete, your assets could go to the wrong person.”
Beneficiary planning is one aspect of estate planning that too many people treat as an afterthought. Taking the time to review and update beneficiaries can help you feel confident your estate will be distributed according to your wishes.
Why Beneficiary Planning Is Important
Most people understand that beneficiary planning is part of estate planning. What many don’t realize is that beneficiary designations often override instructions in a will or trust.
If those designations are outdated or incorrect, assets may be distributed in ways that don’t reflect your current wishes.
Here’s an example. Imagine you make your spouse the beneficiary when you open a retirement account. Several years later, you get divorced and then remarry. You update your will to say that your new spouse should inherit your retirement account, but you forget to update the beneficiary on the account itself.
If you die without changing the beneficiary designation, the funds in your retirement account may well go to your ex-spouse, not your current spouse.
Basic Beneficiary Decisions
Each time you review your estate plan, you should also review and update beneficiary designations. Before doing that, however, you must make some critical decisions about who you want to receive your assets and how you want them to be distributed.
Primary and Contingent Beneficiaries
When deciding who should inherit a given asset after your death, you should always designate a primary and contingent beneficiary:
- Primary beneficiary: The person you want to inherit the asset
- Contingent beneficiary: The person who inherits if the primary beneficiary cannot
Mallory adds, “During the beneficiary planning process, many people neglect to name a contingent beneficiary. That may seem like a small error, but it can cause significant issues with your estate. If the primary beneficiary passes away before you do, the asset may have to go through probate.”
Per Stirpes vs. Per Capita
Per stirpes and per capita describe how inheritance proceeds are distributed among beneficiaries if someone passes away before you. Before you start beneficiary planning, you should understand what these terms mean. Here’s how they translate from Latin:
- Per stirpes: “By the branch”
- Per capita: “By the head”
If you choose a per stirpes distribution of assets, it means a chosen beneficiary’s children inherit their share if the beneficiary is deceased.
A per capita distribution means a deceased beneficiary’s share is distributed among the remaining beneficiaries.
Should You Name Beneficiaries Outright or Use a Trust?
In some cases, beneficiary planning is as simple as naming beneficiaries in your will. When you do this, the beneficiaries gain unrestricted access to their inheritance.
This works for many families; for others, allowing beneficiaries to directly inherit assets can lead to problems like these:
- Young or irresponsible beneficiaries may run out of money by spending too quickly.
- An inheritance could cause a disabled beneficiary to lose their government benefits.
- Creditors may try to seize inherited assets.
- The assets may need to be split with a spouse in the event of divorce.
If you’re concerned about how a sudden windfall may impact your beneficiaries’ lives, consider creating a trust. Mallory shares, “A trust allows you to set spending guardrails, delay inheritance, or otherwise control how and when your beneficiaries receive their funds.”
Need Help With Beneficiary Planning?
Beneficiary planning goes more smoothly when you work with an experienced attorney. Laurel Wealth Planning LLC helps clients implement their estate plans, including naming beneficiaries, to suit their needs and those of the next generation.
If you have questions about the planning process, get in touch online today. To schedule a complimentary meeting, email laurel.wealthplanning@laurelwealthplanning.com or call (952) 854-6250. Find out if the Laurel Wealth Planning team is the right financial advisor for you based on your wants and needs.
Frequently Asked Questions About Beneficiary Planning
Why is beneficiary planning so important in estate planning?
Beneficiary planning is important because certain financial accounts (such as retirement plans, life insurance policies, and payable-on-death accounts) are distributed based on the beneficiary listed on the account, not what your will says. If those designations are outdated or incorrect, assets may go to someone you did not intend. Regularly reviewing beneficiary designations helps confirm your assets pass according to your current wishes.
How often should I review my beneficiary designations?
A good rule of thumb is to review your beneficiary designations whenever you update your estate plan or experience a major life event. Marriage, divorce, the birth of a child or grandchild, or the death of a loved one are all situations that should trigger a review. Many financial professionals recommend checking beneficiaries every few years to confirm they still reflect your intentions.
Should I name individuals or a trust as my beneficiary?
In some cases, naming an individual as a beneficiary works well, especially for financially responsible adult heirs. However, families with young beneficiaries, special needs considerations, or complex estate goals may benefit from naming a trust instead. A trust can provide greater control over how and when assets are distributed. Working with an advisor such as the team at Laurel Wealth Planning in Minneapolis—in tandem with your attorney—can help align your beneficiary planning with your broader estate and financial goals.
The foregoing content was created by Laurel Wealth Planning with verbiage, style and/or format input from Indigo Marketing Agency.
The foregoing content reflects the opinions of Laurel Wealth Planning LLC and is subject to change at any time without notice. Content provided herein has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets, or developments mentioned. The content is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results.
Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
As a precautionary measure, we cannot rely on e-mail requests to authorize, direct, or affect the purchase or sale of any security, wire transfer, or to affect any other transactions. Such requests, orders, or other instructions sent via email should be confirmed verbally or by written instructions faxed to 952-854-6250 prior to their anticipated execution. We are unable to ensure that emails sent to you from us, or sent from you to us, will be received. Please contact us at 952-854-6250 if there is any change in your financial situation, needs, goals, or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend that you compare any account reports from Laurel Wealth Planning LLC with the account statements from your custodian. Please notify us if you do not receive statements from your custodian on at least a quarterly basis. Our current disclosure brochures, Form ADV Part 2 and Form ADV Part 3, are available upon request and on our website, www.laurelwealthplanning.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
Laurel Wealth Planning LLC (LWP) is an Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply any level of skill or training. LWP is a wealth management firm and does not practice law or accountancy. The information and material contained in this communication is confidential and intended for the recipient addressee named. If you are not the intended recipient, please delete the message and notify the sender immediately. The foregoing content was prepared by Indigo Marketing Agency with verbiage, opinions and/or financial commentary input provided by Laurel Wealth Planning.
