Hi everyone! Welcome back to Melissa Making Cents!

As a child growing up in Dallas, Texas, one of my all time favorite songs was (and still is) George Strait's "All My Exes Live in Texas".  Back then, I found it comical that this poor man could be so unlucky in love.  Now... I worry that George may have neglected to update his financial estate plan.  Isn't it funny how time and experience can change your perspective!

Lately I’ve talked a lot about estate planning, including how property is distributed through wills, trusts, and beneficiaries. If you’ve been keeping up with my recent posts, you already know there’s a lot to keep track of! Today’s post is going to cover why it’s important to review and regularly update your beneficiary designations on your financial accounts. Why is this such an important part of estate planning? Well, I’m sure you wouldn’t want your ex-spouse to inherit your financial accounts!  But if you don’t keep your beneficiaries up-to-date...it could happen! (Can you imagine leaving your assets to "Allison in Galveston" who somehow lost her sanity!) 

Here’s a quick overview of what beneficiaries are, how they relate to your financial accounts, and how often to review them.

Beneficiaries inherit assets held in certain financial accounts and trusts 

Certain types of financial accounts, including retirement accounts (IRAs, 401ks, 403b, 457s) and Health Savings Accounts, will be passed on to your beneficiaries that you specifically list on each account. Other financial accounts that pass through to beneficiaries include life insurance policies and annuities. Usually when you set up any of these accounts, you are asked to name a beneficiary to inherit it in the event of your death. This is a straightforward process that only involves providing information like the beneficiary’s name, their relationship to you, and their social security number. The best part of having beneficiary designations right on the financial account is that these assets won’t need to be included in your will.

However, some types of accounts have more strict rules regarding your beneficiaries. For example, 401(k)s require your spouse to be named as the beneficiary. The only exception to this is if the spouse offers his/her consent in writing that you can name a different beneficiary.

Trusts also pass through to beneficiaries. A trust is a legal relationship in which you would place your assets under the care of a trustee (such as a bank, or trusted individual) until the assets are able to be distributed to your beneficiaries after death. If you set up your assets in a revocable, or “living” trust, you can make any beneficiary changes you want. However, an irrevocable trust has terms you cannot change once established--so you will have to choose your beneficiaries carefully the first time around.

Review your beneficiaries every year and after major life events

Since named beneficiaries on financial accounts and trusts supersede any stipulations in your will, make sure your beneficiary designations are up-to-date. You don’t need to review your beneficiaries every time you make a deposit into your account, but it’s a good idea to check annually. 

I also recommend reviewing your beneficiary designations after major life events, such as a marriage, a child’s birth, a divorce, or a death in the family. Remember what I said about exes at the beginning? Updating your beneficiaries after a breakup is a good example of how to avoid situations in which someone inherits your account, when you no longer want them to.  (ahem.. "Dimples who now lives in Temple's, whos got the law looking for me!)

During your review process, you also need to list contingent beneficiaries. This is because if your primary beneficiary passes away but your account hasn’t updated, after your own death the account will go to your estate and the probate process (and trust me, that can be a real doozy). If you don’t have a will, the estate will undergo intestate succession and you would have no say in who inherits your assets. Bummer!

To stay organized, keep a running list of any financial accounts or revocable trusts for which you’ve named a beneficiary. You can also share this information with a financial planner during your estate planning process to make sure that no stone is left unturned. Then, set aside a specific time each year to go through the accounts on the list and review the beneficiaries. Tax season would be an excellent option since you’ll already be in a financial mindset! 

But wait...what if your desired beneficiary isn’t a person?

I’ve had clients before who have asked me if it’s possible to designate a school, nonprofit, or charity as their beneficiary. And the answer is...yes! Retirement accounts, annuities, and trusts can be left to your favorite charity as part of your estate plan. A lot of times this is done for families that have members with disabilities, to give back to those that have supported their family. 

If you want to list a charitable organization as your beneficiary, the first step is to check with the financial institution that holds your account to ensure there are no restrictions. Keep in mind that things get a little more complicated if you want to list a person (or multiple people) AND a charitable organization as your beneficiaries. This is because there are different rules for distribution depending on whether you die before your Required Beginning Date (RBD) for taking minimum distributions. I always recommend working with a financial planner and an estate attorney during the estate planning process, especially when there’s a charity or nonprofit involved.

You don’t have to do your estate planning alone

The estate planning process has a lot of steps. That’s why it makes sense to work closely--and often--with an attorney and a financial planner to make sure you know what will happen to all your assets. If you are starting your own estate planning process or have questions about how to designate your beneficiaries, please call or email to schedule an appointment with me.

Until next time...this is Melissa Making Cents!

Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor in Dallas, Texas.