The Importance of Beneficiary Designations

Beneficiary designations are a crucial—and often overlooked— part of estate planning. A beneficiary designation is a way for you to designate how an asset will be distributed upon your death. Two common types of assets that allow you to designate beneficiaries are life insurance and retirement accounts, such as an IRA or a 401(k).

You may have completed a beneficiary designation form at the time you purchased a life insurance policy or opened a retirement account. But as time passes and circumstances change, failure to update your beneficiary designations to reflect these life changes can have unintended consequences. To ensure that your assets are distributed pursuant to your current wishes, you should review your beneficiary designations every three to five years, or when you experience any major life event, such as marriage, divorce, birth, or death.

If you never named a beneficiary—or if the company lost track of your beneficiary designation form (which, unfortunately, can happen)—that asset will likely pass to your estate upon your death. At that point, the only way for the beneficiary to access that asset is through the cumbersome probate process. Particularly in the case of retirement funds, this could result in negative tax consequences that otherwise could have been avoided. For this reason, you should keep copies of your current beneficiary designations with your other important documents. Whether you have a robust estate plan or no estate plan, reviewing your beneficiary designations regularly will ensure that your assets are distributed to your intended recipients upon your death.