Investing For Your Future Monthly Message
October 2011
It is not enough to invest for your future. You also need to make sure that your hard-earned money is used wisely and gets passed down to those that you select to receive it. Beneficiaries are persons selected to inherit our assets when we die. Typically, they are people or organizations that we care deeply about (e.g., spouse, children, and charitable organizations). Beneficiary designations are required for life insurance policies, individual retirement accounts (IRAs), employer retirement savings plans (e.g., 401(k)s and 403(b)s), and annuities so that proceeds can be transferred to beneficiaries free of probate. It is also wise to name contingent beneficiaries in case a primary beneficiary pre-deceases you or wishes to disclaim an asset (this is typically done for estate planning purposes).
Unfortunately, many people do not keep track of their named beneficiaries. This is a big mistake. First, your assets could be transferred to someone you no longer wish to leave a bequest to (e.g., an ex-spouse after a bitter divorce). Second, if there is no living named beneficiary or contingent beneficiaries, assets have no place to go but to the owner’s estate. This means going through the probate process and additional estate settlement expenses (e.g., legal fees and court filing fees).
In many families, the most important primary beneficiary is a spouse. People want to make sure that sufficient assets are left to their spouse to cover his or her living costs. After a spouse is taken care of, you can name other beneficiaries such as children. However, property inherited by minors can be tricky. A guardian must be appointed by the court to manage the assets of minor children until they reach legal age.
Unlike minor children, adult children can receive property outright. If parents are concerned about an adult child’s ability to manage money, trusts can be established to make sure that they don’t squander their inheritance. If an adult child is disabled, it is wise to consult an attorney to establish a “special needs trust.” This a special type of trust that enables a child to receive assets while maintaining eligibility for government benefits such as Supplemental Security Income (SSI).
Beneficiary designations can easily be changed as needed. With employer-sponsored retirement savings plans such as 401(k)s, workers should contact their plan administrator or HR department to complete the required paperwork. Life insurance policy owners need to contact their insurer. In the case of tax-deferred retirement savings plans outside of work, such as IRAs and annuities, contact the plan custodian. Many of them will allow you to change your beneficiary designation online if you use a password-protected account user name. In most states, beneficiary designations can be changed without a beneficiary’s consent.
With today’s busy lifestyles, it is very easy for people to lose track of who they named as beneficiaries. Reviewing legal documents is not high on our priority list. To help make this task easier, Rutgers Cooperative Extension has a downloadable form, Beneficiary and Personal Representative Designations, to consolidate all your beneficiary designations in one place. It includes spaces to list beneficiaries for life insurance policies, retirement savings plans, and more. The form and be downloaded at http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf.
It is a good idea to let several trusted people (e.g., spouse and adult children) know you’ve compiled your beneficiary designations in one place and share a copy with them. After all, it will do nobody any good if you compile this information and nobody knows that it exists. Not having beneficiary designation data readily available can result in needless expenses and/or time delays in the distribution of assets.
In addition, review the beneficiary designation form periodically, especially after major life events such as marriage, divorce, and the death of a beneficiary. It is not unusual for people to change beneficiaries several times throughout their lifetime. For example, you might name your parents as beneficiaries on a retirement savings account as a young adult and switch to naming a spouse or partner later. If that relationship subsequently ends, you may need to name a new beneficiary again.
Having appropriate and up-to-date beneficiary designations is an important part of financial planning. When considering beneficiaries for your hard-earned assets, consider their resources and characteristics by answering the following three questions: What are their financial needs? How old and self-sufficient are they? and Are they capable and mature enough to manage money?
