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What is a Beneficiary Designation?
When you think about estate planning, you likely think about creating a will that dictates how you want your assets to be distributed to loved ones after you pass. However, your will isn’t the only way you can pass assets to your loved ones. In addition to wills and trusts, you might also make someone the designated beneficiary. This is one area of estate planning you don’t want to overlook and risk not leaving the right assets to the right people.
How Does a Beneficiary Designation Work?
While you might name beneficiaries in your will or trust, there may be accounts outside of your estate plans that also allow you to select a beneficiary. A beneficiary designation allows you to name someone to receive assets from an account upon your death.
In some cases, you may be able to name more than one primary beneficiary, as well as a secondary beneficiary should your primary pass away before you or cannot accept the assets. The designated beneficiary you name also doesn’t have to be a living person. For example, you may be able to choose to have the assets distributed to a charity or your estate.
Common examples of accounts with beneficiary designations:
- Life insurance policies
- Retirement accounts
- Transfer-on-death accounts
- Payable-on-death accounts
One advantage to having a beneficiary designation is that the assets in the account do not have to go through the probate process. This means that your beneficiary can get them soon after your death. However, if you do not leave a designated beneficiary, your estate will automatically become the beneficiary upon your death, which could mean subjecting the assets to probate. This can also happen if your primary beneficiary is not available for any reason and you haven’t named a secondary beneficiary.
Eligible Designated Beneficiaries vs. Designated Beneficiaries
If you’re naming a living person as your designated beneficiary on an inherited IRA, there are two categories they may fall under – eligible designated beneficiaries and designated beneficiaries. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, eligible designated beneficiaries have special privileges and benefits that a designated beneficiary does not.
To be considered an eligible designated beneficiary on an inherited IRA, you must be one of the following:
- The owner’s surviving spouse
- The owner’s minor child
- A disabled individual
- A chronically ill individual
- An individual within 10 years of age of the owner
What if Your Estate Plans Don’t Match Your Beneficiary Designation?
If you aren’t careful, you might not realize that the beneficiary you named on an account doesn’t match the beneficiary you named in your estate plans. Your will might state that the assets left in your retirement account be passed to one family member, while you’ve listed a different family member as the designated beneficiary on the account. It’s important to know that a beneficiary designation typically overrides a will, so in this situation, the assets in the retirement account will be left to the designated beneficiary, not the beneficiary you listed in your will. Mistakes like this can make things unnecessarily complicated for your loved ones after you pass.
Ensure You Have Solid Estate Plans with Martin Heller Potempa & Sheppard, PLLC
You want to feel confident that your assets will be distributed to your loved ones after you pass the way you wanted. However, this can be more complicated than it might seem. At Martin Heller Potempa & Sheppard, PLLC, our estate planning attorneys can carefully help you plan your estate and ensure that your loved ones are properly provided for after you’re gone.
Contact our estate planning attorneys today for more information.
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