Having a current and properly executed will is an important part of estate planning. That having been said, wills need to go through the probate process, which can be time-consuming.
Assets with named beneficiaries, however, are generally exempt from probate proceedings. That’s part of the appeal: Named beneficiaries can access funds quickly, without waiting for an estate to settle, so they have access to the funds they need for everyday expenses.
Financial and investment accounts that disperse independent of your will include:
- Life insurance policies
- Individual retirement accounts
- 401(k) plans
- Health savings accounts
It’s important to review the beneficiaries on your financial accounts, especially after significant life events, such as:
- Divorce or legal separation
- Birth of a child
- Birth of a grandchild
- Purchase or sale of a home
- Disability or long-term illness
- Changes to a trust or will
- Creation or dissolution of a business
Absent or outdated beneficiaries
If you fail to specify a beneficiary, the account benefits will likely revert to your general estate, subjecting them to probate and potential dispute.
On the flip side, if you fail to update your named beneficiary (for example, after a marriage or a divorce), your original beneficiary (possibly a parent or an ex-spouse) will receive the benefits, even if that is not your current preference.
A contingent beneficiary is a backup beneficiary. You might think you don’t need a contingency plan, but it’s best to cover your bases.
Let’s say your spouse is the only beneficiary on your life insurance policy. Later, you both die in a car accident together. Since you didn’t name a contingent on your life policy, the cash benefit will be treated as part of your estate and divided in probate court.
Similarly, if you leave 100% of your retirement account to your child (with no contingency) and they refuse the money, the benefits will be paid to your estate and treated as a cash asset.
You can break down beneficiary benefits into percentages by setting up primary and contingent beneficiaries. For example, you can leave 100% to your spouse as primary and 100% to all your remaining children as contingents. Or you can get granular with the percentages and name multiple people.
Some accounts require explicit permission from your spouse if you want to name someone else as a beneficiary. Additionally, community property rules may affect this determination. Consult with counsel as needed.
Reach out with questions
Take some time to review your assets and update your beneficiaries so the funds are dispersed as you intend. Most accounts have an online portal where you can make changes immediately. Contact your insurance agent, lawyer or account manager if you need assistance changing your beneficiaries.