Ensure your assets go where you intend by naming beneficiaries — and regularly updating them — on your financial accounts.
One of the easiest — and most important — estate planning actions you can take is to name beneficiaries on all your life insurance policies, retirement plans and financial accounts. Yet this critical task is often overlooked.
We can help you thoroughly review your financial accounts and beneficiary designations to make sure they are up to date and accurately reflect your wishes. Here’s what to know about this critical estate planning step — and why it matters for leaving the legacy you want.
What is a beneficiary designation?
In estate planning, a beneficiary is any person or entity you designate to receive an asset after you're gone. You typically name beneficiaries in your will, and for life insurance policies, retirement plans and other financial accounts.
Why designating beneficiaries — and regularly reviewing them — is so important
Naming beneficiaries is one of the most important ways to make sure your assets go to the right people. It’s especially essential for retirement accounts, life insurance and transfer-on-death (TOD) accounts, because the names listed on these accounts usually override whatever is written in your will. That means if your beneficiary list is out of date, your assets could unintentionally go to the wrong people. To prevent that from happening, review your beneficiaries regularly — and after major life events such as death, divorce, remarriage and the birth of children or grandchildren.
How primary, secondary and contingent beneficiaries differ
It is critical to have primary and secondary beneficiaries in place for all financial accounts:
- Primary beneficiaries are those designated first in line to receive an asset.
- Secondary and contingent beneficiaries will receive the asset if the primary beneficiary passes away or disclaims the asset.
Who (and what) can be named as a beneficiary
You typically have broad discretion in naming beneficiaries. However, specific rules may apply if you're married and want to designate someone other than your spouse as the beneficiary for certain accounts, such as IRAs.
Here are the most common designated beneficiaries and how naming them can affect your estate planning goals:
Designated beneficiary | Benefits | Considerations |
Spouse | Surviving spouses have more flexibility to delay taxed distributions and move assets to their accounts when they inherit retirement plans. Widows and widowers are exempt from paying federal estate and inheritance taxes on assets inherited from their spouse. | Spouses often have special rights regarding inheriting assets. Make sure to discuss any tax implications for the surviving spouse. |
Non-spousal beneficiaries (children, family, etc.) | If you are not married or are divorced (and not remarried), you can choose to name an adult child, a sibling, a partner, family member or a friend. | If you are married, you may need your spouse’s consent if you intend to name someone other than them as a beneficiary for a retirement account. Designating a non-spouse as your beneficiary can have different tax implications. For example, non-spouse beneficiaries often have shorter periods to distribute qualified assets and may have required minimum distributions (RMD) on those assets every year. If your children are still minors, designating them as beneficiaries can lead to complications for your estate. |
A trust | Assets in trust can avoid probate and may reduce the taxable estate. Designating a trust as a beneficiary can provide additional control over the distribution of your assets. | Trusts can be costly to set up and add complexity. |
A charity | Choosing a qualified nonprofit as a beneficiary is a simple process and can often be an effective way of managing estate tax implications, especially if you're planning to pass on assets to both loved ones and charitable organizations. | If it’s a sizeable sum, consider informing the charitable organization of your wishes beforehand so you can ensure that your gift is used in the way you intend. |
Your estate | Naming your estate as a beneficiary can feel more straightforward than naming specific beneficiaries for your major assets, but it has significant downsides. | If you designate your estate as a beneficiary, the assets will have to pass through probate court and subject to a legal process that is often time-consuming and expensive. Probate increases the possibility that your assets won't be distributed according to your specific wishes. |
Multiple beneficiaries | If you have multiple heirs and want them to be beneficiaries of the same account, this method allows you to split up your assets as you see fit. | If you want to specify more than one beneficiary on accounts, be specific about the amounts you want to distribute to each. Be detailed about who inherits the assets if a beneficiary passes away before receiving their inheritance. You can have the deceased’s share split between remaining beneficiaries or go to the secondary beneficiary. |
Advice spotlight
If you want your minor children to inherit your assets, there are strategies to make the process smoother.
Naming children directly as beneficiaries can create complications, so many families use a trust or set up a UGMA or UTMA account instead. These are investment accounts set up to benefit a minor but controlled by an adult custodian until the child reaches adulthood.
How different assets impact beneficiaries
The responsibilities and outcomes for beneficiaries can be very different depending on the type of account or asset they inherit:
- Annuities:
- Spouse beneficiaries can cash in or keep the terms of the original contract.
- Non-spouse beneficiaries are required to take distributions.
- Annuity beneficiaries must pay income tax on the gains in the annuity, which amounts to the difference between the principal paid into the annuity and the value of the annuity at the time of the owner's death. (Annuities within qualified retirement plans such as IRAs follow the distribution requirements and taxation of the qualified plan.)
- Retirement accounts:
- Federal law requires a spouse to be the primary beneficiary of a 401(k) account or pension unless the spouse waives their right in writing. Though spouses can roll over the account into a new or existing retirement account, non-spouse beneficiaries cannot.
- Retirement account assets (other than Roth accounts) are taxed when distributed to beneficiaries.
- Life insurance policies:
- In certain states, a spouse may be legally entitled to life insurance benefits.
- Designated beneficiaries of life insurance policies receive the death benefit proceeds income tax-free.
- Non-qualified accounts:
- These financial accounts — which include non-retirement brokerage, savings and checking accounts as well as certificates of deposit — are inherited with a “step-up in basis” to determine taxable gain and have no required distributions. (A “step-up in basis” means the cost of the inherited asset is assumed to be the fair market value on the date of the decedent’s death. This can help reduce capital gains taxes owed, if any, when the asset is sold.)
We make it easy to review your accounts
When reviewing your beneficiary designations, you can update many of your accounts online or ask us to help review your designations to make sure your assets will go exactly where you intend.