When it comes to estate planning and ensuring your loved ones are cared for after you’re gone, wills and trusts often get the spotlight. However, there’s an often-overlooked tool that can be just as powerful: Beneficiary Designations.
Designating beneficiaries on accounts like IRAs, 401(k)s, bank accounts, annuities, and life insurance policies is a straightforward process, but it carries tremendous weight. It’s important to know that these designations can often override your will or trust, making them essential to review and update regularly.
We encourage you to take the time to read the important information below when considering your beneficiary designations. Also, be sure to review your beneficiary designations on all savings, investment accounts, annuities, and life insurance policies that you may have outside Mathis Wealth Management. If you need our assistance, just let us know.
The Crucial Role of Beneficiary Designations in Your Financial Plan
What Are Beneficiary Designations?
A beneficiary designation allows you to name one or more individuals (or entities such as charitable organizations) who will receive the assets in a specific account upon your death. These designations apply to:
- Individual Retirement Accounts (IRAs)
- Employer-sponsored retirement plans (like 401(k)s)
- Bank accounts (often through Payable-on-Death, or POD, instructions)
- Annuities
- Life insurance policies
- Real estate (depending on how the ownership documents are titled)
Why Beneficiary Designations Matter
- They Bypass Probate. Assets with a named beneficiary typically transfer directly to the beneficiary without going through probate, the often time-consuming and costly legal process of settling an estate. This means faster access to funds for your loved ones.
- They Supersede Wills. A common mistake is assuming that a will controls everything. A properly designated beneficiary on a retirement account or life insurance policy takes precedence over anything written in a will or trust. This makes accurate designations critical.
- They Provide Clarity. Clearly named beneficiaries minimize confusion and potential disputes among surviving family members. Beneficiary designations provide less room for interpretation and reduce the risk of litigation over your estate.
- They Offer Flexibility. You can designate primary and contingent (backup) beneficiaries, offering a flexible, tiered approach in case your first choice predeceases you.
- They Influence Taxes and Distribution Options. Especially for retirement accounts, who you name as a beneficiary can impact how the funds are taxed and distributed. For instance, a spouse has more options for rolling over IRA assets, while non-spousal beneficiaries might face required minimum distributions (RMDs) under the SECURE Act.
Common Mistakes to Avoid
- Not naming contingent beneficiaries, which could leave your estate without a clear direction if your primary beneficiary passes away.
- Naming one beneficiary and expecting them to divide the proceeds among other family members. This is a common and risky mistake. Legally, the named beneficiary is under no obligation to share, and this can lead to several unintended consequences. Doing so could also result in significant income tax and possibly gift tax consequences. It can also cause serious strain or conflict within families.
- Not naming a beneficiary at all, which may default your account to your estate and trigger probate.
- Failing to update beneficiaries after life events like marriage, divorce, birth, or death.
- Naming a minor child without setting up a trust or custodianship, potentially causing legal complications.
- Using vague or generic terms like “my children” without specific names, which can lead to interpretation issues.
Regular Reviews Are Key
Review your beneficiary designations:
- At least once a year
- After major life events – for yourself or family member (marriage, divorce, death of family member, birth of child or grandchild, establishment of a trust, closure or sale of a business).
- Whenever you make significant changes to your estate plan.
Final Thoughts
Beneficiary designations are one of the simplest yet most powerful tools in your financial toolkit. They ensure your money goes where you want it to go—with minimal delay or confusion. Don’t treat them as a one-and-done task. Keep them updated and in sync with your broader estate planning goals to give both yourself and your loved ones peace of mind.
And remember, as a fiduciary financial advisor, Mathis Wealth is always ready to provide guidance on the financial matters most important to you. If you have questions about your beneficiary designations or any other important financial matter, please contact us.
