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A Guide to Naming Beneficiaries

Naming a beneficiary is an important decision that can help provide for your family, your loved ones, or other causes you care about in the event of your death. Knowing the ins and outs of beneficiary designations is critical to ensure that your wishes are accurately and properly carried out and that your loved ones are protected.

What is a beneficiary?

The definition and meaning of beneficiary can vary depending on the context, but a beneficiary is generally someone who is entitled to receive money, assets or other benefits. Beneficiaries are commonly used in life insurance policies, pensions, 401k accounts and IRAs, bank accounts, trusts, and other investment accounts.

In order for a beneficiary designation to be valid it must meet certain legal requirements; otherwise, the transfer of the property may not take place as intended by the grantor.

What are the different types of beneficiaries?

Generally, there are two types of beneficiaries: primary and contingent. Primary beneficiaries are usually the first to receive assets upon death. Contingent beneficiaries will only receive assets if the primary beneficiary has passed away or is unable to take possession of the asset(s). It is important to name both primary and contingent beneficiaries in order to ensure that your asset(s) are transferred according to your wishes.

Why is it important to name a beneficiary?

Naming a beneficiary ensures that assets are transferred according to the wishes of the grantor. Without a named beneficiary, assets may be subject to probate which can be time consuming and expensive.

The rules for who can be a beneficiary vary by the type of asset. For example, life insurance policies allow minors to be named as beneficiaries, but bank accounts generally require that beneficiaries be at least 18 years old.

When naming a beneficiary, it is important to consider their financial situation and if they have sufficient capacity to manage any assets received upon death.

Who can be a beneficiary?

Beneficiaries can be anyone you choose, however there are certain restrictions based on the type of asset. For example, you may not be able to name a minor as a beneficiary in some cases. It’s important to check with your estate planner or financial advisor for specific recommendations on who should receive assets upon your death.

What's the difference between a transfer on death vs. beneficiary designation?

A transfer on death (TOD) designation is a way to transfer ownership of an asset upon your death without going through the probate process. This type of designation will allow you to name a beneficiary who will receive the assets upon your death, similar to a beneficiary designation. However, TOD designations are generally limited to bank accounts and other accounts that have this feature enabled (such as vehicle titles in certain states). Beneficiary designations, on the other hand, can be made for almost any type of asset and are not limited to bank accounts.

401k beneficiaries

A 401k is a type of retirement account that lets individuals save for retirement; 401ks are often provided by employers. A 401k account is an important asset that can set up financial security for beneficiaries. It's important to name a beneficiary for your 401k as soon as possible. This beneficiary designation will ensure that the assets are transferred according to your wishes, without having to go through probate.

401k beneficiary rules and information

The rules for who can be named as a beneficiary of a 401k vary by plan; it is best to consult with an attorney and your 401k provider to be sure that you’re following the right steps and properly designating a beneficiary. Generally, your spouse is the primary beneficiary of your 401k account; however, you can name other individuals or even an estate or charity, if desired, depending on your plan.

It is important to note that a transfer on death (TOD) designation will not work for a 401k account. In order to ensure that a beneficiary is able to receive the assets upon the death of the account owner, they must be designated as such through the 401k provider and they must be designated properly. Failing to properly designate a beneficiary could result in the assets being distributed according to state law instead of your wishes.

How can I choose my designations on my 401k plan?

To set your designations on a 401k plan, you will need to contact your plan provider. Your provider should have forms available for you to fill out in order to name the beneficiary and designate other information about how the assets should be distributed. Make sure to read through all of the instructions carefully before submitting any paperwork and check with an advisor or attorney if you’re unsure about any of the details.

IRA beneficiaries

An IRA, also known as an individual retirement account, is a type of pension that can be used by individuals to save for retirement. Similar to 401ks, IRA accounts also have beneficiary designations that must be filled out in order for the assets to be distributed properly. It's important to note that spouses are generally not listed as the default beneficiary for IRAs. Make sure you follow the necessary beneficiary designation rules to specifically designate a beneficiary or beneficiaries in order to ensure that your wishes are followed.

Spouse-specific IRA beneficiary rules

The IRS lays out a few rules for traditional IRAs when they are inherited by a surviving spouse. When the IRA is inherited, there are three choices the surviving spouse has: Treat the inherited IRA as their own by designating themselves as the account owner. Treat the inherited IRA as their own by rolling it into their own traditional IRA or by rolling it over into one of the following taxable accounts: a qualified employer plan, a tax-sheltered annuity plan, a qualified employee annuity plan (section 403(a) plan), or a deferred compensation plan of a state or local government (section 457(b) plan). Continue listing themselves as the beneficiary of the IRA.

Any distributions from the deceased's spouse's IRA can be rolled into the IRA of the surviving spouse, so long as: This takes place within the 60 day limit. The distribution is not a "required" distribution. The surviving spouse isn't the sole beneficiary of the IRA.

Given the specificity of these rules, it's important to consult with a financial advisor or a company representative when making decisions about beneficiary designations for IRAs.

Do beneficiaries of IRAs have to pay taxes?

Yes, beneficiaries of IRAs are subject to income taxes on the distributions they receive from the account. The exact amount varies depending on the type of IRA account and when distributions occur. It is important to consult with a financial advisor or tax preparer in order to determine potential taxation amounts before designating any beneficiaries for an IRA.

Life insurance beneficiaries

Life insurance beneficiaries are designated in a similar way to other accounts. In order to designate someone as the beneficiary of your life insurance policy, you will need to fill out paperwork with the applicable insurer and provide information about who should receive the death benefit upon your passing. Make sure that all of the necessary paperwork has been filled out properly and that you've given copies to the appropriate individuals.

Life insurance policies typically have default designation rules in the event that no beneficiaries have been listed, which is most often your estate. It is important to make sure that you've named a beneficiary in order to ensure that your wishes are followed upon your passing.

Revocable vs. irrevocable life insurance beneficiaries

When it comes to life insurance policies, there are two types of beneficiaries: revocable and irrevocable. Revocable beneficiaries can be changed at any time until the insured person’s death while an irrevocable beneficiary cannot be altered or removed unless they agree in writing to the change. Consulting with a financial advisor or insurance representative before making any decisions about life insurance beneficiaries can help you feel more confident in your choices.

Can there be multiple beneficiaries with a life insurance policy?

Yes, it is possible to name multiple beneficiaries for a life insurance policy. When naming more than one beneficiary, make sure that you clearly indicate how the death benefit should be split or which percentage each beneficiary should receive.

Do life insurance companies contact beneficiaries?

Yes, life insurance companies will typically contact the beneficiaries listed on a policy upon the death of the insured party. The company will usually send out a notification letter or call to inform the beneficiary that they are entitled to receive benefits from the life insurance policy and how to proceed in claiming them. This is why it's incredibly important to revisit beneficiary designations regularly and make sure the beneficiary information is up to date. It's also helpful to provide this information to your legal representative or your executor in advance so they know who to contact when the time comes.

Pension beneficiaries

Pension plans provide a stream of income to those who've retired. If you have a pension plan, it's important to understand the beneficiary designations associated with it and make sure that these are up to date.

Pension beneficiary rules

If you pass away before your pension finishes paying out, the beneficiary you've designated will receive any remaining payments. When failing to designate a beneficiary, the pension plan typically follows the protocol explained in the pension plan, so ensure you've read through the rules and understand them. If you don't designate a beneficiary and the pension plan does not have any specific rules regarding death with remaining pension payments, pension plans are generally distributed according to the state's rules.

With these rules in mind, you can see why it's important to ensure you've designated a beneficiary for your pension plan in order to ensure that your wishes are followed upon your passing.

How are pension plans paid out to the designated beneficiary?

When a beneficiary is named, the pension plan will generally provide payouts depending on the type of pension plan and the rules of the specific plan. Generally, there are two types of payments that can be made to beneficiaries: lump sum payment or installment payments.

Once again, consulting with a financial advisor or tax preparer can help you understand which type of payout is right for your pension plan.

Bank account beneficiaries

Bank accounts function slightly differently than other types of plans or policies when it comes to beneficiary designations. Unlike other types of beneficiaries where you'd typically designate a primary beneficiary, many bank accounts do not require or even ask for a named beneficiary. Funds that are in your bank accounts at the time of your death are typically transferred to your estate; if you're married, half of the funds in the account typically transfer to your spouse and the rest goes to your estate.

Bank account beneficiary rules

Designating a beneficiary on a bank account ensures the beneficiary can receive the funds without having to go through probate. This is important to remember as it can save the beneficiary a lot of time (probate often takes months and even years to resolve) and ensure they're able to access the funds immediately.

The process for naming a beneficiary on a checking account is a bit different from other types of plans. When you officially name a beneficiary on a bank account with your bank, the account is technically converted into an informal trust. (A trust is one way to transfer assets to a loved one, on death, without having to force them through probate.) When the bank account is converted into an informal trust, it's known as a Payment on Death (POD) account.

You have a lot of flexibility when it comes to designating a beneficiary for a POD account in that you can name more than one beneficiary, you can specify a certain percentage each beneficiary should receive, you can change the designated beneficiary, and you can name individuals, organizations, or even other trusts as beneficiaries.

To name a beneficiary for a bank account, you'll need to contact your bank and ask them for the necessary paperwork. Generally, you'll be asked to fill out some forms that can include beneficiary information such as full name, address, Social Security number (SSN) and date of birth (DOB).

As with all other plans, policies, and accounts, it's important to make sure you're naming the correct beneficiary and to review your documents prior to submitting them. Also, keep in mind that some banks may have additional rules and regulations when it comes to naming a beneficiary on a bank account, so check with your bank for specific protocols.

Naming a beneficiary for your accounts is an important step in ensuring that your wishes are followed upon your passing. It's essential to understand the rules and regulations surrounding beneficiary designations, as different types of plans and policies may require specific protocols or paperwork. Consulting with a financial advisor or tax preparer can help you make sure you're making the right decisions when it comes to naming your beneficiaries. When in doubt, check with your bank or other financial institution for assistance.

Ready to start estate planning? Use Ever Loved's key information checklist to get started. This checklist helps you manage and record important information on your accounts so that your loved ones are prepared when the time comes.

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Last updated December 7, 2022
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