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the basics of beneficiary designations

The Basics of Beneficiary Designations

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Beneficiary designations are your instructions for who will inherit your financial accounts, like IRAs, 401(k)s, life insurance policies, and certain investment accounts, after you pass away.

Understanding beneficiary designations is crucial, and here’s why:

Why Are Beneficiary Designations Important?

First, these designations allow your assets to bypass probate, meaning they go directly to the named beneficiaries without the delay and expense of court proceedings. This ensures that your savings reach the people you intend, minimizing the risk of confusion, legal disputes, or unintended inheritances.

Who Can Be a Beneficiary?

You have a lot of flexibility in choosing beneficiaries. You can name:

  • Your spouse
  • Children
  • Grandchildren
  • Other relatives
  • Friends
  • Charities

Types of Beneficiaries

Beneficiaries fall into two main categories:

  1. Primary Beneficiary: This is the first person “in line” to receive your account assets after your death.
  2. Contingent Beneficiary: This person inherits the assets if the primary beneficiary predeceases (dies before) you or is unable to receive them, such as a minor child. You can name multiple contingent beneficiaries.

Per Stirpes vs. Per Capita

These terms are important for distributing assets to contingent beneficiaries if one predeceases you:

  • Per Stirpes (by branch): If a contingent beneficiary, like a child, passes away before you, their share goes to their descendants (your grandchildren).
  • Per Capita (by head count): The share of a deceased contingent beneficiary is divided equally among the surviving contingent beneficiaries, not the deceased’s descendants.

If you’d like to learn more about per stirpes and per capita, you can checkout my in-depth blog Futureproof Your Estate: The Ultimate Guide to Per Stirpes vs. Per Capita.

In Conclustion

It’s important to review your beneficiary designations regularly, especially after significant life events like marriage, divorce, or the birth of a child. Make sure your designations are clear, accurate, and up-to-date, and consider how they fit into your overall estate plan. For complex situations, seek professional guidance from a financial advisor or an estate planning attorney.

Additional Considerations

The SECURE Act of 2019 changed inheritance rules for retirement accounts. Now, most non-spouse beneficiaries must empty inherited accounts within 10 years, which can affect your beneficiary designation strategy.

By understanding and properly managing your beneficiary designations, you ensure that your retirement savings and other assets are distributed according to your wishes, providing financial security and peace of mind for your loved ones after you’re gone.

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