Beneficiary Designation
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Choosing who will get your assets or the payout (referred to as a “death benefit”) from your life insurance policies is an important decision to make because a beneficiary designation cannot be amended or corrected after you die.
It’s critical to update your beneficiary designations when your life changes (marriage, children, divorce, etc.). Here is some basic beneficiary information that may be of use.

What is a Beneficiary?

A beneficiary is a person or entity who you legally name as the recipient of the benefits from your financial products.
That is the death benefit paid by your life insurance policy if you die. That is the balance of your assets in your retirement or investment accounts.

What is a Beneficiary Designation?

The act of naming the person who will receive an asset in the case of the account owner’s death is known as the beneficiary designation. Life insurance coverage and retirement savings are two common examples. When the account owner dies, the assets in their account are transferred to the beneficiary they specified.

You can also select your estate as the beneficiary. Instead of passing the asset to a person, the estate receives it. The asset is then dispersed in accordance with the stipulations of your Trust or Will.

It’s worth mentioning that the SECURE Act was passed by the Trump Administration in December 2019. It established new restrictions for compulsory withdrawals from inherited retirement accounts. It should be noted that the word ‘designated beneficiary’ has been redefined as a living individual who does not fall into one of the five categories listed below:

  • Surviving partner
  • A minor under the age of 18
  • A person with a disability
  • A person who is chronically unwell
  • An individual within ten years of the deceased

As a result of the SECURE Act, everyone who fits into one of the five categories listed above is an ‘eligible designated beneficiary.’ For the purposes of this article, ‘designated beneficiary’ includes eligible designated beneficiaries.

The key difference between qualified designated beneficiaries and designated beneficiaries is that they have more flexibility in taking payments from their inherited assets. This emphasizes the importance of conducting research prior to making beneficiary designations.

Are There Different Types of Beneficiary Designation?

There are various sorts of beneficiary designations, and the number of types has risen as a result of the recent SECURE legislation. So far, we’ve talked about the distinction between an eligible designated beneficiary and a designated beneficiary. When managing your assets, keep the following beneficiary designation types in mind:

  • Eligible Designated Beneficiary (EDB): According to the 2019 SECURE Act, EDBs fall into one of five categories. These beneficiaries have advantages over other beneficiary kinds.
  • Designated Beneficiary: A DB is any live individual who has been identified as a beneficiary but does not fit into one of the five EDB categories.
  • Non-Designated Beneficiary (NDB): A non-living beneficiary is not designated. This includes charitable organizations, estates, and trusts.
  • Primary Beneficiary: The named beneficiary is the first in line to receive benefits and thus the principal beneficiary.
  • Contingent Beneficiary: A Will may name a contingent beneficiary who will receive benefits if the principal beneficiary dies or is unable or unwilling to accept the assets.

Secondary beneficiary and contingent beneficiary are terms that are used interchangeably.
It is vital to note that a stated beneficiary is not always a living person. You can arrange for your assets to be handed to your estate as an NDB (not designated beneficiary). In this situation, the Will will specify who will inherit which assets and how much, among other things.

Does a Designated Beneficiary Have the Authority to Override a Will?

In most cases, a named beneficiary takes precedence over a Will. This is due to the fact that the institution that controls the account, such as a bank or life insurance company, will transfer the asset to the beneficiary named for that specific account. This doesn’t always match up with directions provided in a will.

That is why it is critical to ensure that your Will and beneficiary designation do not clash. You should make certain that the provisions in your Will are in sync with the identified beneficiaries of those asset-holding accounts or insurance. Otherwise, the directions in your Will may not be carried out as planned.

It is feasible to name your Estate as the beneficiary of your assets if you want to consolidate and avoid uncertainty. Your Will would then specify to who these assets should be allocated, in what percentage, and any other relevant stipulations.

Why Do I Have to Designate a Beneficiary?

Many financial instruments, including life insurance benefits, are not normally governed by your will, so the only way to ensure that your policy’s benefits are allocated as you wish is to choose a beneficiary for all of your policies and accounts.

Although naming a beneficiary is not required, it is frequently the reason people get life insurance in the first place – to provide a benefit to someone they care about. When you die, your other possessions may also benefit the people you care about.

What if I Don’t Designate a Beneficiary?

If you do not name a beneficiary, it may be unclear who is entitled to the funds, which may cause the benefit payment to be delayed.

If you die without naming a beneficiary for a retirement account, such as a 401(k), your assets would likely be held in probate – a legal process in which a judge must sort out your financial status and determine how to distribute your assets.

Also, if you do not name a beneficiary, most life insurance policies have a default order of payment. If the owner of the policy is not the insured person and is still living, the death benefit will be paid to the owner’s estate; otherwise, it will be paid to the owner’s estate. In the case of group insurance coverage, the order usually begins with your spouse, then your children, then your parents, and finally your estate.

If your policy does not specify a default order, the payout may be paid to your estate or kept in probate.
In either scenario, the probate process can be time-consuming and complicated, and it may take years before your loved ones can access your assets – something you can avoid if you name them as beneficiaries.

How Do You Choose a Beneficiary?

To name a beneficiary, follow the instructions supplied by the entity that owns the asset. At times, it will be a simple task, such as filling out an online web form. When you first open the account, the corporation will usually ask you to name a beneficiary. Just make sure you have your preferred beneficiary’s full legal name and contact details.

Keep in mind that specified beneficiaries become active the minute you die and may mistakenly overrule any provisions in your Will regarding asset inheritance. It is beneficial to use online tools to assist you to evaluate and update your estate planning and beneficiary designation papers.

Who Can Be Named as a Beneficiary?

#1. A person, a charity, a trust, or your estate can be your beneficiary.

A beneficiary can be almost anyone, albeit your state of residency or the provider of your benefits may limit who you can identify as a beneficiary.
Before naming your beneficiary, make sure you understand the regulations in your state. If you live in some states, you may be obliged to name your spouse as your primary beneficiary and nominate that person to receive at least half of the benefit. With your spouse’s written approval, you may name someone else in some states.

#2. Beneficiaries include immediate family members.

Anyone who may suffer financially as a result of your death is likely to be your first pick for a beneficiary. As long as the overall proportion of the proceeds equals 100 percent, you can normally divide the benefit among many beneficiaries.

Some people name a trustworthy adult, such as their spouse, and rely on their judgment to consider donating money to help other family members or loved ones.

#3. Beneficiaries can be minors.

Children under the age of 18 might be designated as either the primary or contingent beneficiary. If you die while they are minors, the proceeds may be paid to the legal guardian of the minor child’s estate in their name.

Another frequent method for making allowances for children is to establish trust. In that situation, the trust might be named as the beneficiary.

Minor children may not be allowed to access your assets or life insurance profits until they reach the legal age of consent, so you may wish to set up a trust or custody arrangement if you want the payout used for their benefit while they are still youngsters. Consult an attorney for assistance in determining the right vehicle for your situation.

#4. Beneficiaries with special needs and other long-term dependencies

It may seem natural to select someone as your beneficiary who would require financial support throughout their lifetime, but doing so may make them ineligible for government aid, which could result in a large loss of financial support for them.

Creating a special needs trust and naming it as the beneficiary is one approach to direct your assets or life insurance death benefit to someone with special needs while avoiding laws that may act against them. To learn more about your alternatives, speak with an estate planning attorney.

#5. Designating charities or organizations as recipients

Many people name charities and other charitable organizations as recipients.
If you are enthusiastic about a nonprofit, you can name it as a primary or contingent beneficiary to receive all or a portion of your assets or life insurance payout. This can be a powerful way to leave a lasting legacy.

Is It Possible to Modify the Beneficiaries?

Most life insurance policies and other financial accounts allow you to change the beneficiaries at any time.
Changing beneficiaries is usually simple; the difficulty is often remembering to do so. To find out how, contact your employer, a financial professional, or a financial services business.

When Should You Update Your Beneficiaries?

Beneficiary changes are frequently forgotten after a divorce, remarriage, or the death of a loved one who was named as one of your beneficiaries.
In some jurisdictions, divorce may invalidate a designated spouse’s entitlement to receive a benefit, therefore you may need to re-designate with an updated relationship (from “spouse” to “ex-spouse”) if you want the designation to continue in force.

Using your employer’s annual benefits enrollment to revisit the specifics of your accounts and insurance plans is an easy method to remember to keep your beneficiaries up to date.
If your employer does not provide benefits, choose a date that you will remember each year — May Day, Labor Day, or your birthday — and spend 10 minutes reviewing your accounts and policies.

Special Conditions For Beneficiary Changes

In rare cases, such as under the terms of a divorce or if you make an “irrevocable designation,” you may not be able to change or name a new beneficiary without the approval of your present beneficiary.

Similarly, if you have given someone else ownership of an account or a life insurance policy, you are no longer the owner and cannot change the beneficiary.
In general, you, your financial advisor, or your attorney will be aware if any of these scenarios apply to you.

Is It Possible for the Incorrect Individual to Collect Your Benefits?

If you forget to update your beneficiaries or make a mistake in documenting them, someone other than the authorized beneficiary may receive your assets or policy money. This is why it is critical to carefully designate and remember to update beneficiaries.
If you are concerned about making a mistake while naming your beneficiaries, consult a financial advisor or an attorney to guarantee your wishes are carried out.

Important Mistakes to Avoid During Beneficiary Designation

Here are five major blunders to avoid when dealing with beneficiary designations:

#1. There is no beneficiary named at all.

Many people do not name a beneficiary for their retirement savings or life insurance policies. People may not understand they may name a beneficiary, or they simply never get around to filling out the documents.

If you do not name a beneficiary for life insurance or retirement accounts, the financial company will decide where your assets go after you die. Typically, the proceeds of life insurance are given to your probate estate. This means your family will have to hire a lawyer, go to court, and probate your estate in order to receive the proceeds.

If you are married and receive retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account would most likely be paid to your probate estate, which has unfavorable income tax consequences. When an estate is named as the beneficiary of a retirement account, all assets must be paid out of the account within five years after death. This causes the deferred income tax to be accelerated, requiring payment earlier than would otherwise be required.

#2. Failure to consider special conditions.

Not all loved ones should be immediately given an asset. These people include minors, those with special needs, and people who are unable to handle their assets or have creditor problems. Children will be unable to claim the assets because they lack legal capacity. A court-appointed person (known as a conservator) will be responsible for claiming and managing the money until the youngster reaches the age of 18.

Conservatorships can be expensive, and the court requires annual accountings. Furthermore, conservators are frequently required by the court to submit a bond, which is normally acquired from an insurance company and can be costly.

Individuals with special needs who acquire assets directly may lose significant government benefits since they will most likely own too many assets to qualify once they get the inheritance directly. Individuals with financial troubles or creditor issues may also lose the asset due to mismanagement or debts.

In such cases, it is advisable to establish a Trust as the beneficiary. The Trustee (the person in charge of the Trust) can claim and manage the asset for your intended receivers for a period of time appropriate to each case.

#3. Getting the name wrong (or incorrectly).

People sometimes fill out their beneficiary designation forms incorrectly. A family may have numerous persons with similar names (such as Sr., Jr., and III), but the beneficiary designation form may not be specific. Individuals’ names change over time due to marriage or divorce, or false assumptions about a person’s legal name can be established.

Not having names that exactly match might cause payout delays, and in the worst-case scenario of two people with similar names, it can lead to a lawsuit.

#4. Over time, you may forget to update your beneficiaries.

Who you want or should name as a beneficiary will very certainly change as your circumstances change. A beneficiary designation is part of an overall estate strategy. Your estate plan should evolve in tandem with your life.
Beneficiary designations are a vital element of the overall plan, so be sure they are kept up to date.

Not consulting with legal and financial advisors about your beneficiary selections.
In a comprehensive financial and estate plan, beneficiary designations should be completed. To establish what is best for your specific circumstances, consult with your legal and financial advisors.

Remember, beneficiary designations are intended to give you ultimate control over who inherits your assets after you die. By taking the time to carefully (and correctly) select your beneficiaries, and then revisiting those selections and making any required modifications on a regular basis, you keep control of your money… and that, after all, is what estate planning is all about.

Beneficiary Designation and Tax Consequences

After you die, your Will will most likely be submitted to the court for probate. The court will certify the legality of your Will and authorize your executor to begin serving as your executor at this point. Your estate is “taxed” (paid a fee) as part of the probate process.
This is getting a little complicated, but certain of your assets can be kept “outside your estate.”

Assets with designated beneficiaries (such as insurance policies and registered investments) are generally excluded from your estate. This means there will be no probate cost, and your beneficiary will get the benefit straight from the institution rather than the executor.

It is possible that those assets will become part of your estate in certain circumstances. For example, if you do not choose a beneficiary or specify your estate as the beneficiary, the assets will become part of your estate before they are distributed.

These assets will be liable to probate expenses if this occurs. As a result, your beneficiaries may receive less than they would have received if you had identified them as beneficiaries under the policy.

There are specific tax ramifications if you die while holding an RRSP. Essentially, the value of your RRSP is included in your income for the year you died.
If the beneficiary is your spouse or common-law partner, a child or grandchild under the age of 18 who is financially dependent on you or a child or grandchild of any age who is financially dependent on you due to a disability, the tax on this income may be delayed.


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