Keys Behind Beneficiary Designation

The decisions behind designating beneficiaries for your life insurance policies or retirement plan may seem straight-forward.  However, naming beneficiaries is a nuanced decision-making process that could have substantial repercussions on your loved ones if done incorrectly.  Below are a few things to keep in mind as you make these designations:

1. The Basics. You can name beneficiaries for a broad range of assets and you can name almost anyone, or anything, as your beneficiary.  Naming a beneficiary allows your assets to pass directly to who you designate, therefore avoiding probate.  Be aware that beneficiary designations will override bequests you make in your will. 

2. Update Designations. Review your designations on a regular basis, ideally as part of an annual review of your finances.  Major life events, such as marriage, divorce, or death, may require you make changes.

3. Understand Tax Consequences. Inheriting assets will have tax ramifications for your loved ones.  If you are making someone other than your spouse the beneficiary on your company retirement plan, they might have to take mandatory distributions from that plan and pay taxes on the money.

4. Be Specific. It is important to be as specific as possible when designating beneficiaries.  Most beneficiary designation forms allow you to name multiple primary and contingent beneficiaries and to specify what percentage of assets you want distributed to each person.

See Christine Benz, How to Handle Beneficiary Designations, Morningstar News, Oct. 10, 2014.