As you gather your year-end documents for tax preparation, there is one important financial item that should be included: checking your insurance policies and other important financial records and plans to ensure that your designated beneficiaries are up to date. It's a good idea to review beneficiaries annually because life events may have changed your situation. Parents die, marriages dissolve, children are born, and any of these events may warrant a change in beneficiaries. Failing to periodically update your beneficiaries could have unintended consequences - you might not want a former spouse rather than your current spouse to be the beneficiary of your assets but that could happen!
Here are some best practices when naming beneficiaries:
Always name a beneficiary. People who have wills often think they have their beneficiaries covered, but this assumption can be wrong. Generally, beneficiaries named in insurance policies and retirement plans will take precedence over any instructions you leave in your will. Make sure you have specified individuals as beneficiaries in your policies and plans. People often name their "estate" as the beneficiary but this can lead to benefits being tied up in probate court. Failure to name a beneficiary may also mean that you miss out on certain plan or policy advantages. For example, if you name an estate as beneficiary, an IRA will be liquidated on your death and taxes will be due. If your spouse is named as beneficiary, he or she could potentially continue to enjoy tax-free growth.
Be specific. Avoid ambiguous language. Simply stating "my husband" or "my niece" may not be sufficient, particularly in instances of multiple marriages. It's a good idea to use full names of intended beneficiaries to avoid potential confusion or disputes.
Name a secondary beneficiary. Make sure that it will be you and not your state law that determines who will be the recipient of your policy benefits. If your primary beneficiary should pass away and you have not named a secondary or contingent beneficiary, your insurance policy or retirement plan will be distributed according to your will. If you have no will, the decision will default to state law.
Keep important records in a secure place and tell a trusted family member what and where they are. Many people die suddenly without leaving instructions as to where a will, insurance papers and other important records are kept. All too often, benefits go unclaimed because family members don't know about potential benefits or can't find important account information. Bank accounts and insurance policies are overlooked. Make sure someone in your family is familiar with your most important records and where they are kept.