You've kept your will updated regularly to make sure your assets are distributed according to your wishes upon death. Have you done the same thing with your beneficiary designations? If not, your wishes may not be carried out as you expect.
A will covers the destination of most assets upon your death. However, assets that require beneficiary designations, such as 401(k) or IRA retirement accounts, annuities, or life insurance policies, are distributed per the designation for that account. A beneficiary designation takes precedence over the directions in a will or trust.
You may not have changed the beneficiary designation since the account or policy was first started. To update your beneficiary designation, contact the company responsible for maintaining the account. They will send you the necessary form to fill out, sign, and return. Keep a copy for your own files.
Whenever possible, designate a contingent beneficiary to receive the account in case the primary beneficiary passes away before you forget to update the beneficiary list. Without a listed contingency, your account designation falls to a default based on the original agreement you signed and the corresponding state laws.
There are two typical default distributions for beneficiary designations: per capita and per stirpes.
Per capita distribution is fairly simple: All members of a particular group receive an equal share of the distribution. Within a will or trust, that group can refer to any group you designate — your children, all your combined descendants or individuals called out by name. Under per capita, the share of any beneficiary that precedes you in death is shared equally among the remaining beneficiaries.
Within a beneficiary designation, per capita typically refers to an equal distribution among your children. To verify this, check with the company and any state laws that apply.
Per stirpes distribution follows a generational approach. If a named beneficiary precedes you in death, then the benefits would pass on to the deceased beneficiaries' children in equal parts. Spouses are generally not included in a per stirpes distribution.
Let's assume you have three children: Fred, Mike, and Sally. Fred and Sally have two children of their own, but Mike has none. Under per stirpes, if Fred were to precede you in death, Mike and Sally would each receive one-third of the benefits and each of Fred's two children would receive one-sixth. If Mike were to precede you in death, Fred and Sally would each receive half of the benefits.
If you need a custom arrangement regarding multiple beneficiaries or limitations to be placed on the benefits – for example, that benefits may only be used for a specific purpose or are not transferrable to a beneficiary's spouse – contact the company to see if options are available to modify the beneficiary agreements. You'll need an attorney's assistance to craft a custom beneficiary designation tailored to your situation.
We recommend making a list of all your accounts that have beneficiary designations and keeping it with your will. If you don't have a copy of the latest beneficiary designation form, write down the primary beneficiary, contingent beneficiary, and the date the beneficiary designation was last updated for each account.
Estate planning is never a pleasant chore. Who wants to think about his or her own death? Nevertheless, it's important to keep both your will and all beneficiary designations up to date. You won't care, because you'll have crossed to the other side — but be considerate enough to not leave a mess behind for your heirs to untangle.
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