As you accumulate wealth over your lifetime, your thoughts may eventually turn to leaving a legacy to your heirs after your death. Your first course of action may be to have an attorney draft a will for you. But as you start to explore the many wealth transfer strategies available to you, remember that even the best laid estate plans can come crashing down if you fail to address one essential, but often overlooked, element of estate planning: beneficiary designations.
There are two types of beneficiaries: primary and contingent. Naming a primary beneficiary designates or appoints who will become the immediate owner of your assets in the event of your death. Most people typically list their spouse as their primary beneficiary. In addition, you can also name a contingent or secondary beneficiary – someone who will receive your assets should your primary beneficiary not outlive you.
Many people are unaware of just how important it is to select and update the beneficiaries of their insurance policies and investment accounts. While wills remain important estate planning tools, beneficiary designations generally take precedence over the terms of a will. So, regardless of how current your will may be, unless your beneficiaries are also up to date, your estate plans may not be carried out in the manner you intended.
Any time you experience a major life event, such as marriage, divorce, birth of a child, or death in the family, you’ll want to conduct a beneficiary review. Failure to do so could result in unintended consequences when you pass away. For example, if you opened an account before you were married and named your parents or siblings beneficiaries, they – not your spouse – would stand to inherit your assets unless you update your beneficiary designations. The same goes for ex-spouses – a divorce decree will not negate your prior beneficiary designations. If your ex-spouse is still listed as the primary beneficiary on your investment accounts or insurance policy when you pass away, this could complicate matters, especially if you’ve remarried. In cases in which no beneficiary is named, your assets will likely be turned over to your estate, which could subject your heirs to costly probate expenses and higher taxes.
Regularly reviewing and updating your beneficiary designations with your financial advisor can help you ensure that your assets will be passed along to your heirs according to your wishes and potentially avoid costly mistakes. You will also want to consult with a qualified attorney prior to making important beneficiary designation decisions.
Angela Sugimura is a Senior Vice President/Investments and Branch Manager with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, and can be contacted in the Murrieta office at (951) 461-7220.