The Importance of Beneficiary Designations

There is lots of talk about New Year’s resolutions this time of year. We are nearly three weeks into the new year and many resolutions are already a distant memory, particularly if said resolutions were massive departures from the status quo.

I’m not a consistent resolutioner, but I like taking time at the start of a new year to look ahead and map out key goals and plans for the next twelve months. Those blank calendar pages are full of possibility and fun to contemplate.<—Is this just me?

Setting goals and dreaming big is exciting. Doing the work to achieve the goals can be less fun and it is easy to lose steam part way through the quest. When it comes to implementation of changes to my routines or habits, I have learned that small steps over time are much more effective for me than a cold turkey approach. This is especially true for fitness goals and money management. Saving $100 per month for ten months is much easier than coming up with $1,000 in one day.

Big projects like getting your finances organized can feel overwhelming and leave you spinning your wheels wondering where to begin. Sometimes that overwhelmedness causes us to concede defeat before we have started. Breaking the process down into smaller action items helps to keep things manageable and the progress made motivates us to stay the course.

While there is a myriad of things we can do to organize our financial lives, they don’t all have to be done at once.  That doesn’t mean you are off the hook.  It  is important to begin the process. None of us can afford to throw in the proverbial towel on our personal finances because we are overwhelmed, busy, defeated, or feeling stuck. There is too much at stake for you and the people you love.

So, back to those small steps that keep us on the path to accomplishing bigger goals. Today’s post covers one relatively painless step that needs to be taken on the path to improving your personal finances.

This is something everyone needs to do to get their financial house in order. Yes, I mean everyone. Okay, I should say this applies to anyone with a bank account. If you keep all your money under your mattress or in coffee cans in the backyard, you are exempt from this particular activity. Everyone else, see the resolution below and make it your own.

Designate beneficiaries on all your financial accounts.

Okay, that was a bit anticlimactic. Sorry. Stay with me. Designating beneficiaries is important, easily accomplished and costly if overlooked. If you are one of those people who enjoy crossing to-do list items off your list, this one is for you. It will only take a few minutes and is well worth your time.

Designating a beneficiary on a financial account provides instructions about what should happen to the funds at the time of your death. This is typically done by filling out a beneficiary designation form or completing a payable-on-death or transfer-on-death agreement with the financial institution holding the funds.

Typically when you open a new bank account, the account setup form includes a section asking you about beneficiaries on the account. Writing in a name and basic contact information for your chosen beneficiary is all that is required.

For many of your accounts, you likely have beneficiaries in place just by virtue of the initial setup process, but you could have accounts without any named beneficiaries.  It just takes a few minutes to put the beneficiary designations in place. No excuses – get it done!

Why are beneficiary designations important?

Not having beneficiaries designated on an account at the time of your death can be costly, both financially and emotionally for your loved ones.  Assets in accounts with named beneficiaries generally pass outside of probate. Bypassing probate means that the assets can generally be distributed more quickly and simply (no probate court involvement needed).

At the time of my grandma’s death, she had an investment account for which no beneficiary designations were on record. That simple oversight meant that the assets in that account had to be included in the probate process. As a result, these assets  were subject to probate legal fees equal to 2% of the estate and the distribution of assets was delayed by several months. If a simple beneficiary designation had been completed on this account, it would have saved thousands of dollars in legal fees and allowed those assets to be distributed to heirs more quickly. Ouch.

What do you need to do?

Make a quick list of your financial accounts or sign up below to download a worksheet to get started.

When you are making your list of accounts, we’re talking about bank accounts and investment accounts. Don’t forget to include your retirement accounts, even that old 401(k) account from three jobs ago that is still out there.

Next to each account make a note of who should be the beneficiary upon your death. Identifying a primary beneficiary and a contingent beneficiary is best so that if the primary beneficiary predeceases you, plan B is in place. You can also name more than one primary and contingent beneficiary. For example, if you wanted to leave 60% of the account assets to one person and the remaining 40% to another, you would list both people as primary beneficiaries noting the percentage of assets to be distributed to each.

This is the most important part. Confirm that what you have on your list is actually what is on record with your financial institutions. If you access your investment account information online, in most cases you can access your beneficiary designation information the same way. Or you can make a quick phone call to your bank or investment broker to confirm your beneficiary designations.

If you want to make changes to your beneficiary information, the required steps will vary by institution but will likely require some simple paperwork updates submitted in person or electronically.

That’s it. Mission accomplished. Doesn’t that feel good?

Bonus points are awarded if you also take a minute to confirm the beneficiaries named on your life insurance policy, too. Wait – you don’t have life insurance? Stick around. More on that to come.

thanks for reading,
Lesley

The content of strongerwallet.com is provided for general information purposes only and does not constitute professional advice. Readers should not act upon the content or information without first seeking appropriate professional advice about their specific situation.