Beneficiaries — Who gets your assets?

You've worked hard to create a good life for your family. But if you died tomorrow, who would inherit the spoils of your success? When you draw up a will, you can be very specific about who gets what - except when it comes to retirement accounts, life insurance, and certain other financial accounts. So it’s important to name a beneficiary across all your investments and life insurance policies and to periodically review your beneficiary choices.

Why you should designate your beneficiaries.

Let's say you have $100,000 in your 401k and a $1 million life insurance policy. You'll want to make sure those assets go to the right people when you die. If you name your beneficiaries, they'll likely get them directly without having to deal with the courts. Beneficiary designations trump whatever’s in your will. If you leave the beneficiary form blank, your assets may be divided through the probate process. The probate process differs from state to state - but wherever you live, chances are that a complete stranger will determine who gets your assets. In some cases, they'll be divided equally among all living relatives. Yes, that could include ex-spouses.

If you’re married, your spouse is probably going to be your primary beneficiary. For example, employer-sponsored retirement plans generally require you to get written permission to name someone other than your spouse. A spousal beneficiary means you have a lot of flexibility in how your assets are distributed. Four options are:

1. Roll over the balance to a new retirement account in your own name — This keeps the money in a tax-deferred account, but now in the beneficiary’s own name.
2. Start taking payments — Spouses can roll the funds to an inherited IRA and take "required minimum distributions" based on your life expectancy
3. Leave the money in the original plan account — If the beneficiary does not immediately need the money, this “take-no-action” option is one of the simplest approaches. If the deceased's account was a 401k or other employer-sponsored plan, check the plan rules to make sure you can leave it.
4. Take the money in cash — This option works if the money is needed for immediate expenses, but income taxes will be due, and you would lose out on the future earning potential of those investments.

If you’re single, you can name anyone as your beneficiary. Young people with modest assets sometimes name their parents. But as your net worth grows and your parents age, be aware that an inheritance from you might create tax issues for them.

A mistake that parents often make is to name minor children as beneficiaries without appointing guardians. The rules vary by state, but unless you’ve named legal guardians for your children through a trust, the courts could decide when and how your kids receive the money.

It can also be a good idea to name contingent beneficiaries—one or more people who could receive your assets if your primary beneficiary dies or is incapacitated.

Understand "per stirpes" and "per capita"

You'll probably see these options on a form to designate beneficiaries, but do you know what they mean? If you select "per stirpes" that means if one of your beneficiaries dies before you, the money that person would have received would go to their heirs. If you select "per capita," the pre-deceased beneficiary's heirs would get nothing - the funds would instead be split amongst any other living beneficiaries. For example, let's say your beneficiaries are your three adult children, who all have kids of their own. If one of your children unfortunately dies before you, do you want that person's children (your grandchildren) to receive that portion of the assets (which would be per stirpes), or would you want it all to go to your two surviving children (per capita)?

Dot the "i"s and cross the "t"s. Then do it again.

So you've put a lot of thought into your will and your beneficiaries. Make sure you stay in control of who inherits your assets by updating your beneficiary designations whenever something happens in your life - such as a marriage, the birth of a child, a divorce or the death of a spouse. These aren't decisions you'll make lightly. Also, keep in mind that a lot has changed with what beneficiaries can do with an account since the SECURE Act of 2019 passed. Work with your financial advisor to help you through these many decisions.