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A beneficiary designation describes to whom the associated account will be distributed at the account owner's death. A common example of a beneficiary designation is the beneficiary listing on a life insurance policy. Beneficiaries can include spouses, children, other family members, other people and charities. An account with a valid designation will be distributed outside of the probate process.

Why are they important?

The purpose of a beneficiary designation is to clearly identify the intended beneficiary of an account at the account owner's passing. The use of a beneficiary designation on accounts and other assets avoids the distribution of that asset through the probate process. Generally, the asset will be paid to the intended beneficiary faster and easier than if the probate process were used. A beneficiary designation also overrides any contrary instructions in a will or trust.

Frequently, they provide your family which much-needed liquidity shortly after your passing for final expenses and other needs. The funds in an account with a beneficiary designation are generally distributed very quickly after the owner's passing, unlike an account that becomes part of a probate estate.

Do beneficiary designations have disadvantages?

Beneficiary designations can cause problems with asset distribution. As noted, they take precedence over a contrary instruction in a will or trust. An outdated, incomplete or missing beneficiary designation on an account or other asset can seriously disrupt your estate plan by placing the asset into your probate estate, creating a financial hardship for your family when funds are not immediately available. They can also cause family discord when an expected inheritance is not received. One example is when a will says the estate is to be divided among the children equally, but just one child is the beneficiary of a substantial bank account.

What are some of the common mistakes with beneficiary designations?

  • No beneficiary listed
  • Only primary beneficiary listed
  • Estate listed as beneficiary
  • Intended beneficiary is a minor
  • Intended beneficiary is a special needs person
  • Trust named as beneficiary

Beneficiary designations are an essential part of the estate planning process. They need to be carefully coordinated with other account designations as well as the owner's will or trust to efficiently distribute your estate to the intended beneficiaries.

For more information on beneficiary designations, request your copy of "Avoiding Common Mistakes with Beneficiary Designations" today.

Graphic of our Avoiding Common Mistakes with Beneficiary Designations booklet

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