When you’re young and have few (if any) assets, you may not put much thought into estate planning or choosing your beneficiaries. But no matter what age you are or how small or large your estate is, it’s important to designate beneficiaries for your various assets and accounts, just in case something were to happen to you. Failing to do so might create costly probate expenses for your loved ones.
Below, we explore what to consider when naming your beneficiaries and how to make a choice you can feel good about.
What is a beneficiary?
If you are trying to protect your assets from the headaches and costs of probate, it’s smart to take the time to assign at least one beneficiary to those assets where you are permitted to name a payable on death or transfer on death beneficiary rather than relying on a Will alone. Remember, what passes through your Will passes through the probate process, which brings additional (needless) costs to our estate as well as paperwork headaches for your loved ones. It also exposes your assets to creditors, who may try to file claims in probate in order to access your assets if you rely on your Will alone. By naming a primary beneficiary and even a contingent secondary beneficiary, you allow whomever you name to promptly and easily receive your assets without these concerns.
There are two different types of beneficiaries: primary and contingent.
What is a primary beneficiary?
A primary beneficiary is the first person who is entitled to your assets. If you don’t name a primary beneficiary, in some states what happens to your assets will be determined by the state in which you reside.
For certain types of accounts, a surviving spouse is automatically assigned as the primary beneficiary unless you say otherwise. In some cases, you may be able to name more than one primary.
What is a contingent beneficiary?
A contingent beneficiary is the second in line beneficiary who would be entitled to inherit your assets if your primary beneficiary predeceases you. You can choose to name more than one contingent beneficiary and split a percentage of your assets among them.
Choosing your beneficiaries: Questions to ask
You can select any person by simply naming them on the proper designation forms. However, you can also name an entity, such as a revocable living trust. It depends on what your overall goals are for your estate plan and the age of your beneficiary or beneficiaries. If the person you choose is under the age of 18 and not inherited under the terms of a trust, their inheritance will be subject to additional legal requirements with a court to have that child’s legal guardian qualify as a court-appointed guardian for those assets until the minor reaches the age of majority.
If you’d prefer to avoid family drama, you do not need to name a child or family member; you can elect to name a charitable organization as your beneficiary. It is not unusual to name a charitable organization as a secondary beneficiary after naming a spouse or children as primary, just in case none of them survive you.
Choosing a beneficiary can be a very emotional process. For example, if you choose one child over the other, you may fear that the child who is not chosen will feel like they are less important. It’s important that you don’t let anyone persuade you when choosing a beneficiary. Just because choosing a spouse or the oldest child seems like the obvious choice does not mean it’s the right one.
When choosing a beneficiary, consider the following:
- Which loved ones may need financial help upon your death?
- Which assets would you like to keep in the family?
- Which charities and organizations are important to you that you’d want to financially help?
- Who has your best interest in mind?
- What are your account provider’s rules for naming beneficiaries?
As a good rule of thumb, review your beneficiaries and your overall estate planning goals every few years to re-evaluate them. It’s likely you have accounts you set up years ago and don’t recall which beneficiaries you named. Change happens — people get divorced, children are born, and families lose contact. Be sure you always know exactly where your assets will go when you die.
For assistance with choosing beneficiaries and other Virginia estate planning needs, schedule a free consultation with the Law Office of Patricia E. Tichenor.