5 Things You Need to Know Before You Name Beneficiaries
Once you have chosen the people you want to receive any of your assets — either from a Will, a Trust, a Life Insurance Policy, or a Retirement or Bank Account — the way you designate how they will inherit should be a key consideration.
Here are five things you need to know before you name your beneficiaries:
1. Beneficiaries of a Will have to wait. Any assets you bequeath to a beneficiary via a traditional Will have to wait to be transferred until the probate process has been completed. In Massachusetts, this generally takes 12-18 months at a minimum. If the estate is complex, the legal fees will deplete that inheritance. If you want to make it easier for your beneficiaries, consider creating a Revocable Living Trust as part of your estate plan. A trust does not go through probate; upon your death, the successor trustee distributes the assets to your beneficiaries as you have directed in the Trust. Generally, for parents with minor children, this is in “ages or stages” of life.
2. Retirement plan and life insurance policy benefits are paid directly. The assets in a life insurance policy or retirement plan are not subject to probate and pass to your beneficiaries directly. Your beneficiaries will receive these assets after providing the account owner’s proof of death and a proof of identity for the beneficiary. This includes children who are 18 years old or older (see number 3 for minors). Naming contingent beneficiaries is important; if the primary beneficiary predeceases you, the assets will likely go into your estate and will be subject to taxes. In Massachusetts, that’s 8-16% of the total value of your estate, including life insurance policies.
3. Minor children should not inherit directly. Naming a minor child as the beneficiary of a life insurance policy or other assets is never recommended. If your minor child is named as a beneficiary of your Retirement Account or Life Insurance Policy, a Court will require that a “financial parent” be appointed to manage the funds until your child reaches the age of 18. This can result in additional expenses that would delve into that inheritance, and those assets may not be managed according to your wishes. Instead, the wise move is to create a trust to hold these assets for the benefit of a minor child and name a successor trustee to oversee the management and distribution of the funds in a way that complies with your wishes.
4. Give careful consideration to naming retirement plan beneficiaries. Studies have shown that most beneficiaries of a retirement plan take the cash immediately, which may not be your intention. Naming your estate as beneficiary of a retirement plan is also not recommended since doing so would not allow your spouse or younger beneficiary to take advantage of an IRA rollover or the “stretch” IRA option that could allow your IRA to grow tax-deferred over many years.
5. If there are multiple beneficiaries, name them. If there are multiple beneficiaries for an insurance policy or retirement plan, don’t make the mistake of just naming one person — say, the oldest child — and assuming they will make the proper distributions. Instead, designate a separate share for each beneficiary. If one of your beneficiaries has special needs, create a trust for their share so any inherited assets don’t disqualify them from important government benefits.
This article is a service of 20West Legal, LLC, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.