A full review of one's estate plan includes not only the will and trusts, but beneficiary designations, too. Life insurance policies, annuities and retirement plans, among other accounts, allow you to name a beneficiary to receive the assets directly. This may help avoid a potentially expensive and lengthy public court proceeding.
Failing to update the designations in light of significant life changes such as marriage, divorce, death of a beneficiary or birth or adoption of a child may lead to unintended transfers and tax consequences.
Note, however, that there are special rules for spouses and community property.
In addition to life changes, you may want to revisit beneficiary designations when you change retirement plan or insurance providers. And remember that beneficiary forms always override the instructions in a will, so make sure the two are consistent. The following tips can also help ensure your assets transfer as smoothly as possible after you're gone.
Be specific. Most forms allow you to name several primary and contingent beneficiaries, and it pays to do so. If your primary beneficiary is not around to collect and you have no secondary beneficiary named, the assets may revert to probate. Spell out how you want the proceeds divided to avoid any confusion.
Bear in mind taxes. In the case of a retirement plan, be aware that beneficiaries may need to take – and pay taxes on – mandatory distributions. For more details, speak with your tax advisor.
Account for special situations. Assets left to minors may be transferred to a custodial account until they reach the age of majority. If so, it is important to select a financial guardian or arrange a trust. You can also include instructions about how to manage the assets. Take care in naming a loved one with special needs as beneficiary, as a substantial inheritance may affect his or her eligibility for governmental benefits. Talk to an attorney and an estate planner about setting up a special needs trust.
Keep good records. When you make a change to your beneficiary forms, keep a copy for yourself and let loved ones know where to find it.
To change life insurance designations, contact your insurance agent or benefits administrator if your policy is through your district. Your district should be able to provide you with the forms necessary to update beneficiary designations on your 403(b) or 457 plan.