When you decide who should receive your assets – whether through a will, trust, life insurance policy, retirement account, or bank account – it’s not enough to just write down a name. The way you designate your beneficiaries can have a huge impact on how, when, and even if they actually receive what you intended. Here are five important things you need to know before naming your beneficiaries.
1 | Beneficiaries of a Will Have to Wait
If you leave assets to someone through a will, they won’t receive them right away. A will must go through probate, which is the court process of settling an estate. Depending on the situation, probate can take months – or even years – and in the meantime, your loved ones may be left waiting. On top of that, court costs and attorney’s fees can eat away at what they eventually receive.
A better option for many families is to create a Revocable Living Trust. Unlike a will, a trust allows your assets to be transferred directly to your beneficiaries without going through probate, saving both time and money.
2 | Retirement Plans and Life Insurance Bypass Probate
Retirement accounts and life insurance policies work differently than a will. The assets in these accounts go directly to the beneficiaries you’ve named, without going through probate. Your beneficiaries usually just need to provide proof of your death and their identity to claim the funds.
However, it’s critical to name contingent beneficiaries as well. If your primary beneficiary dies before you and you haven’t named a backup, those assets could end up in your estate – subject to probate and possible taxes.
3 | Don’t Leave Assets Directly to Minor Children
It may seem natural to name your child as a beneficiary, but if that child is under 18, the law won’t allow them to directly manage their inheritance. Instead, the court will step in, appoint a guardian, and oversee how the assets are used. This process can add unnecessary costs and may not reflect your wishes.
A smarter approach is to create a trust for your child’s benefit and name a trustee you trust to manage those assets until your child is old enough. This ensures your money is managed responsibly and according to your instructions.
4 | Be Strategic With Retirement Plan Beneficiaries
Studies show that most people who inherit retirement accounts cash them out immediately. While this may provide quick access to money, it often leads to significant tax consequences and prevents the account from growing tax-deferred over time.
You should also avoid naming your estate as the beneficiary of a retirement account. Doing so can eliminate options like spousal rollovers or “stretch” IRAs, which allow heirs to benefit from long-term tax advantages. Naming individual beneficiaries, or even a trust in some cases, is usually the better strategy.
5 | If You Have Multiple Beneficiaries, Name Them Specifically
If you want more than one person to inherit from an account or policy, don’t just name one child and expect them to “share.” That approach often leads to conflict or unintended outcomes. Instead, name each beneficiary directly and specify what percentage or share they should receive.
If one of your beneficiaries has special needs, you should go a step further and create a special needs trust for them. This ensures they can inherit without losing access to vital government benefits.
Final Thoughts
Naming beneficiaries may sound simple, but the details matter more than most people realize. A poorly made decision can delay distributions, cause unnecessary taxes, or even disqualify loved ones from important benefits. That’s why I always recommend reviewing beneficiary designations as part of a comprehensive estate plan, rather than treating them as a quick form to fill out.
If you want to ensure your loved ones are truly protected, I invite you to schedule a planning session with me. Together, we’ll make sure your beneficiary choices reflect your wishes, avoid unnecessary pitfalls, and protect your family’s future.
At Cheever Law, 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, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a no-obligation 15-minute introductory phone call today.