Following some basic guidelines will ensure the beneficiary designations you make are accurate and up to date.
Q: My dad apparently never updated his beneficiary designations, and it caused substantial problems after he passed away because one of the beneficiaries had predeceased him. How often should beneficiaries be reviewed?
A: While there is never a bad time to revisit the beneficiary designations you have made over the years, we generally recommend this activity be completed annually. Unfortunately, once various beneficiary forms are completed, they are often forgotten until the time of death. In many cases, executors find that no beneficiaries have been named at all, creating confusion, anger, and time delays in settling an estate. In other cases, the named beneficiaries may no longer be members of the family due to divorce or death.
One of the main reasons for this oversight is that many of the financial accounts requiring a beneficiary designation are established earlier in life. There may be a life insurance policy that was purchased when you were first married, an IRA that you opened prior to marriage, etc.
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Having a sound financial plan dictates that you ensure there are designated beneficiaries for all your retirement plan accounts, life insurance policies, and other assets, and that they are the intended recipients based on your current familial arrangement. It is often not as cut-and-dried as it first seems. Following these guidelines should help you avoid the most common mistakes:
Do not leave the beneficiary lines blank. If you don’t name specific beneficiaries for your accounts, or if you name your estate as the beneficiary, your heirs will likely end up in probate court. This can be both time-consuming and costly. If assets go to your estate, they are subject to the reach of creditors. A better option is to choose individual beneficiaries and list them on the forms.
Consider trusts for beneficiaries who are minors. In some states, minors face restrictions until they turn 18 or 21. If you designate a minor as a beneficiary, a court will appoint a guardian to manage the funds until the child reaches the age of majority. Alternatively, you might establish a trust to handle the funds and name the trust as the beneficiary. Thus, you maintain control now and provide asset protection for minors when you are gone.
Next: "Understand the key rules"
Understand the key rules. Beneficiary designations on retirement accounts and insurance contracts will override your will. If you want someone other than your spouse to inherit retirement account assets, your spouse must sign a written waiver. Without the waiver, a non-spouse beneficiary designation will be invalid upon your death.
Inform your beneficiaries. Do not keep your beneficiary designations a secret. Also, let the people you have designated as beneficiaries know where to find important documents and contact information for your professional advisers. On the other end, make sure your advisers have the vital contact information.
Double-check names and numbers. Make sure names are spelled correctly and that figures are accurate. This is particularly important when listing Social Security numbers as well as telephone numbers and addresses.
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Consider percentages instead of dollar amounts. Suppose your IRA is worth $100,000 at the time you complete the beneficiary form, and you designate a nephew as beneficiary of $75,000. If the IRA drops in value to $75,000 or below at your death, your nephew gets the entire amount; any additional beneficiaries receive nothing. An alternative way to meet your objectives is to give your nephew 75% of the overall account value.
Name contingent beneficiaries. If your primary beneficiary has died and you have not updated your accounts with a new primary, the assets would go to your contingent (or “secondary”) beneficiaries. If a contingent beneficiary was never named, the assets are transferred to your estate (see above). Avoid potential problems by indicating contingent beneficiaries in appropriate places.
Finally, don’t stuff all the paperwork in a desk or drawer somewhere and forget about it. Make the proper beneficiary designation adjustments when warranted and review these annually with your adviser to ensure that they remain up to date and make financial sense.
Q: What does the term “passive investing” mean?
A: Passive investment management typically refers to the use of index mutual funds within a diversified portfolio. Investors use passive management because it provides broad market diversification and low relative internal expense ratios. Passive management focuses on a buy-and-hold strategy within the portfolio, which results in relatively low trading costs despite the large number of security positions within an index portfolio. Passive investing through an index fund also provides significant diversification benefits since index portfolios hold all the stocks comprising their specific asset class universe.
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