Are Your Beneficiaries Up to Date?

March 7, 2023
Designating beneficiaries is a simple way to help protect your estate and avoid probate.

Your heirs should play an essential role in your estate plan. Unfortunately, designating beneficiaries on your investment accounts can easily slip to the bottom of your to-do list. But this task shouldn't be forgotten. It can help protect a sizeable portion of your estate and ensure that your assets go to the right people once you pass away.

Here's what you need to know about adding or updating beneficiaries to your accounts.

Who can be a beneficiary?

Typically, you'll want to name your spouse, children, or anyone who financially depends on you as your beneficiaries. However, you may also consider appointing siblings, other family members, a friend, or even a charity, trust, or your estate to inherit your account assets.

There are two types of beneficiaries: primary and contingent. If your primary beneficiary is deceased—which is a good reason to update your beneficiaries periodically—your assets pass to your contingent beneficiary. In case a designated beneficiary predeceases you, a "per stirpes" distribution election allows the beneficiary's children to inherit their share. 

Keep in mind that you can name multiple people or entities to be primary or contingent beneficiaries by splitting the proceeds among them. (The amounts don't need to be equal as long as the total percentage equals 100%.) 

Also, be sure to check if your state or account has any restrictions on designating your beneficiaries. Some may require your spouse to be listed as a primary beneficiary and also receive a minimum percentage before you can list others. Your spouse may also need to give written permission if you decide to update your primary beneficiaries down the road.

Why do I need a beneficiary?

Even if you already have a will or trust that outlines how your assets should be distributed upon your death, designating a beneficiary can be a powerful estate planning tool. For example, you can specify who should inherit your retirement and life insurance assets without adjusting your will or trust documents. 

In fact, beneficiary designations take precedence over wills and trusts in most cases, making them virtually probate-proof. Having beneficiaries on your account circumvents the probate process and helps ensure that assets can be transferred to heirs without delay. However, if a designated beneficiary predeceases the owner and there is no contingent beneficiary, probate will likely be required.

When should I update my beneficiaries?

Regularly reviewing your account beneficiaries should be part of your financial and estate planning strategies. But certain life events and account changes demand immediate attention. 

Marriage, divorce, the birth of a child or grandchild, the loss of a spouse or child—all these events can prompt a change in beneficiary decisions. Keeping your beneficiaries up to date helps ensure that you don't inadvertently leave money to the wrong people or leave a loved one out of your plan. 

Also, anytime you close an account and move your money over to a new one, you'll want to make sure you take the time to specify your beneficiaries again. For example, if you recently rolled over a 401(k) from a former employer or transferred an existing IRA to a new financial firm, your beneficiary designations won't transfer over with your assets. 

The bottom line

Generally, updating your beneficiaries is simple—you can often make changes online or by completing paperwork. If you need advice about designating your beneficiaries, talk to an attorney or estate planner to help ensure your final wishes are carried out.

Schwab can help you with an estate account.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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