Tax Planning Insights: April 2022

Reviewing who receives your assets when you die requires annual review. Here’s Why.

The Importance of a Beneficiary Review – Now!

It’s easy to lose track of beneficiaries you’ve assigned to your key accounts and other important documents. Should something happen to you, this situation can create a mess. The press is filled with examples of what can go wrong. For example, look at the mess created with singer-songwriter Prince’s estate after he died in 2016 without a will.

The best way to avoid this problem is to understand the importance of periodically reviewing your beneficiaries and creating a simple plan to review and organize this task.

The importance of a periodic beneficiary review

To ensure your assets go to the intended recipients (and avoid probate). When you designate a beneficiary for certain accounts, that person inherits the assets in the account, regardless of what your will might say. That’s why updating your will periodically might not be enough. Typically, you’ll have beneficiaries for each of your IRAs, 401(k)s or other retirement plans, annuities and insurance policies. The only way to ensure your assets go to the intended recipients and to avoid a long, drawn out legal process (probate) is by reviewing your designations on an annual basis.

To update your estate after a significant life event. Since you made your initial beneficiary choices, you might have gotten married, had children, or gotten divorced. Some of the beneficiaries you chose could have married, divorced or passed away. Or their circumstances could have changed so you no longer want them to be the beneficiary. Going through your list of beneficiaries will help you determine if the right recipients are accounted for, and if you need to make changes.

To respond to an increase or decrease in your wealth. Maybe you sold your business or inherited a trust. Or you’ve experienced poor investment portfolio performance. As your wealth changes, you’ll need to consider how it affects your estate planning, and whether or not your beneficiaries still fit with your strategy.

To keep beneficiary reviews top-of-mind. Many assume reviewing beneficiaries on an annual basis is only for the super wealthy. Not so! Most employees have life insurance and retirement accounts that need beneficiaries identified. And the cost of not having the beneficiaries being current means the government’s laws decide the process for you. This can create a huge delay in your heirs receiving funds during a time when they may need them the most.

Reviewing your beneficiary designations

Here are five steps to help you review and organize your beneficiary designations:

Identify accounts. Obtain copies of the designations for the following (when applicable):Will
Insurance policies
Bank accounts
Retirement savings accounts (IRAs, 401(k)s, etc.)
Company benefits
College savings accounts
Investment accounts

Follow up on missing information. Request copies of beneficiaries if your records are missing. Double check their contact information and any name changes due to marriage or divorce.

Review the designation allocation. Double check that assets are going where you want and that you’re minimizing taxes. Ensure that there are back-up beneficiaries when appropriate.

Report revised designations to the account custodians. Obtain a written acknowledgment for each change you make to your beneficiary designations. Please be aware that banks and insurance companies sometimes lose forms, and that could thwart your careful planning.

File acknowledgements. File the acknowledgments with your will and other estate planning documents. Then review and communicate clear instructions to someone so access to these records is available should you unexpectedly pass away or become incapacitated.

Review your beneficiary designations at least once a year to make sure they are still appropriate. They may be simple forms, but they’re too important to ignore.