Choosing beneficiaries is a key part of financial planning and estate planning.  The choices you make – or fail to make – will influence who inherits your assets and how much time and hassle will be involved in transferring your assets to the appropriate parties.  

Those assets can include financial accounts, insurance policies, real estate, your home, a car, a share of a business, a coin collection, jewelry, and anything else of value in your estate.

What is a beneficiary?

A beneficiary is one or more individuals or other entities designated to inherit assets from your estate, insurance policies, and accounts after you pass away. 

Beneficiaries can include family members and friends, charities, or organizations that hold special meaning to you. This flexibility allows you to create a legacy that reflects your values and priorities.

Why Choosing Beneficiaries Is Important

By naming beneficiaries for your assets, you help ensure that the assets are transferred according to your wishes.

Designating beneficiaries is important for another reason, too. It helps prevent future disputes between family members about who should get which of your possessions. By clearly identifying beneficiaries in your estate planning documents, you eliminate ambiguity and potential arguments among family members or loved ones, which can lead to emotional turmoil and financial strain.

Furthermore, appointing beneficiaries can simplify the transfer of some assets, enabling access to money without the need for drawn-out probate procedures.

Where to Designate Beneficiaries 

We typically associate beneficiaries with wills, but those aren’t the only places naming beneficiaries is important   

In addition to your will, other important places to designate how your estate will be distributed when you are deceased include:

• Life Insurance Policies: The beneficiary receives the death benefit payout, which is usually tax-free.
• Bank Accounts: When you name beneficiaries for bank accounts, they become Payable on Death (POD) accounts). Funds in PODs of a deceased person are transferred directly to the beneficiaries without passing through probate.
• IRAs: Standard and Roth Individual retirement accounts
• Employer-Sponsored Pension Plans: These are plans such as 401K, SEPs, Employee Stock Ownership Plans (ESOPs), profit sharing, and various other employer-sponsored plans. 
• 403(b) Plans: Retirement accounts for employees of public schools and tax-exempt organizations, such as teachers, nurses, doctors, and librarians
• Investment Accounts: Designating beneficiaries for your non-retirement investment plans makes them Transfer on Death (TOD) accounts).  Similar to POD accounts, investments transfer directly to the named beneficiaries when you die.
• Trusts: When you create a trust, the individual or group for who you create a trust is the beneficiary of the trust
• Real Estate: Thirty states have enacted laws allowing transfer on death (TOD) deeds. TODs allow you to name beneficiaries on your deed for real estate.  This is quite different from adding someone to your deed. (Adding someone to your deed makes them a co-owner of the property. This has many potential negative tax and liability issues.)  

Related content: Understanding minimum distribution requirements (RMDs)

How to Choose Beneficiaries on Your Accounts

There are several steps to take to name the heirs you want to inherit your assets. Choosing beneficiaries not only makes it clear who should receive your assets. It also helps your heirs avoid probate on some assets and receive their money sooner.  Here’s how to proceed:

• Identify all the accounts, policies, and financial instruments you own. I like to make and keep an updated list of all my accounts in case my loved ones need it.   This includes retirement accounts (e.g., 401(k), IRA), life insurance policies, bank accounts, and investment accounts. Check with your state, too, to see if they allow TOD deeds.
• Check Current Designations: This information is usually available through your account statements, online account portals, or by calling the financial institution. 
• Review the beneficiaries on each account. Do all of the accounts have beneficiaries? And if so, do you need to make any changes?  Beneficiaries that are named in accounts generally override the provisions of your will. If your former spouse is listed as a beneficiary on your retirement account, they will get that money even if your will says all your assets should go to your current spouse.
• Obtain the Necessary Forms: Most financial institutions require you to complete a designation form to name or update your beneficiaries. These forms are usually available online through your account portal or by calling.
• Add or Update the Beneficiary Information with your choices for:
  • Primary and Contingent Beneficiaries: You can typically name both primary beneficiaries who receive the assets first and contingent beneficiaries (also called secondary beneficiaries) who inherit if the primary beneficiaries are unable to.
  • Percentage Allocations: Specify how the assets should be divided if you name multiple beneficiaries. For example, you might allocate 50% to each of your two beneficiaries.
• Follow Instructions: Carefully follow the instructions provided by the institution. You may need to provide information including beneficiary’s full name, date of birth, Social Security number, and relationship to you.

Submit the Updated Forms

Once the forms are completed, submit them to the financial institution. Some institutions allow electronic submissions, while others may require mailed or in-person submissions.

After submission, confirm that the update has been processed.

Regularly Review and Update Your Designees

• Life Changes: Review and update your beneficiaries whenever you experience significant life events.  These events include marriage, divorce, the birth of a child, or the death of a previously named beneficiary.
• Periodic Review: Even without major life changes, it’s a good practice to review your beneficiary designations every few years. Ensure they still align with your wishes.

Communicate with Your Beneficiaries

Keep them informed. While not legally required, it’s a good idea to inform your beneficiaries that they’ve been designated. Then they will know what to expect in the future. 

Coordinate with Your Will and Estate Plan

Consistency is important. Ensure that your beneficiary designations align with your overall estate plan and will. Discrepancies between your will and beneficiary designations can prevent assets from going to the heirs you want to receive them and lead to confusion or legal challenges.

Do I Still Need a Will After Choosing Beneficiaries?

Even if you name beneficiaries on certain accounts, it is still advisable to have a will. While naming beneficiaries helps ensure that specific assets bypass probate and go directly to the intended individuals, a will covers other important aspects of your estate plan: 

• Assets Not Covered by Beneficiary Designations: Wills governs the distribution of assets without designated beneficiaries, such as personal property, real estate, or other accounts.
• Guardianship of Minor Children: If you have minor children, a will allows you to name a guardian who will care for them if something happens to you. Without a will, the court will decide who becomes their guardian.
• Personal Wishes and Specific Bequests: A will lets you specify how you want personal belongings, family heirlooms, or specific gifts distributed. This is particularly important for items that might not have beneficiary designations.
• Backup Plan: Wills serve as a safety net. If for any reason a beneficiary dies before you and you don’t name a secondary beneficiary or if you forget to name a beneficiary on a new account, the will provides instructions on how those assets should be distributed.
• Debt Payment and Estate Expenses: A will outlines how your debts, taxes, and final expenses should be paid, helping to ensure that your estate is handled according to your wishes

By following these steps, you can ensure that your beneficiaries are up to date and reflect your current wishes. This proactive approach helps to ensure a smooth transfer of assets and reduces the likelihood of disputes or delays.