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What are beneficiary designations and how can you use them?

Few things are as crucial as crafting a comprehensive estate plan when planning for the future. This is because an estate plan allows you to articulate your wishes and to help safeguard your loved ones’ financial security and ease the burden of decision-making during challenging times. Creating an estate plan involves a lot of terminology, some of which may be unfamiliar to the everyday person. One important term, whether you are creating a will, trust or combination of documents, is a beneficiary designation.

Beneficiary designations are formal and legally binding instructions provided by account holders to designate individuals to inherit their assets. Specifying beneficiaries helps account holders gain control over how their assets will be distributed. Whether you have a retirement account, life insurance policy or investment accounts, you can use beneficiary designations to help secure your legacy.

The types of assets with beneficiary designations

Individual Retirement Accounts (IRAs), 401(k)s and other qualified retirement plans often allow you to name primary and contingent beneficiaries. Reviewing and updating these designations regularly is essential to help ensure they align with your current wishes. Life insurance policies also have a beneficiary designation form where you can specify the person or entity that will receive the death benefit.

Additionally, you can designate beneficiaries to receive the remaining balance of your annuities. Annuities are financial products that provide periodic payments in exchange for an initial lump sum. Lastly, certain investment accounts, such as brokerage accounts and mutual funds, allow for Transfer-on-Death (TOD) designations.

The importance of beneficiary designations

One of the main advantages of a beneficiary designation is that it is separate from your will and can circumvent the probate process. Probate can be a lengthy and expensive procedure, often delaying the distribution of assets to heirs. By naming beneficiaries, you help ensure your loved ones can access funds promptly.

Additionally, your will cannot govern an account with a beneficiary designation. Therefore, unlike a will, which becomes a matter of public record during the probate process, beneficiary designations are private. This confidentiality helps to protect your family’s financial privacy and keeps your wishes confidential.

Essentially, when you designate beneficiaries, the assets are directly transferred to them without the need for court involvement. This streamlined process can bring much-needed relief to your loved ones during a challenging time.

By designating beneficiaries for your financial accounts and assets, you can better ensure that your legacy passes smoothly to your loved ones. Remember that no matter how unique your situation is, a seasoned professional can review and update your designations to help ensure that your estate is distributed as per your wishes.