Some financial products like life insurance or tax-advantaged retirement accounts require you to name one or more beneficiaries. However, that’s not the case with many assets. For instance, you can buy a house or set up a savings account without designating who should receive it when you pass away. While beneficiary designations for specific financial products are necessary, they are not sufficient by themselves for creating a comprehensive estate plan. A financial advisor can help ensure that you have a holistic estate plan.
What Is a Beneficiary Designation?
A beneficiary designation assigns a person or party to receive benefits from a financial product, such as a retirement account or life insurance policy. For instance, say you have life insurance with a $500,000 payout. If you pass away, your insurance company fulfills the policy by distributing money to your designated beneficiary (the person, people, or entity you define in your policy). You might list your spouse, children or siblings as beneficiaries. You can also choose a charity or nonprofit organization to receive money from your policy.
Some financial products allow you to assign two types of beneficiary designations: primary and contingent. As the name suggests, your primary beneficiary has priority in your list of beneficiaries. In other words, if you pass away, the insurance company or financial institution will attempt to send payment to your primary beneficiary first. If your primary beneficiary doesn’t respond to the communication or is no longer alive, the company will try to distribute payment to your contingent beneficiaries.
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What Is a Will?
A will is a legal estate planning document stating your intentions for possessions after you die. Typically, a will defines an executor to carry out your desires. Then, it assigns possessions to beneficiaries listed in the will. Lastly, you can appoint guardians for your children if they are minors.
A single person can create a will, and spouses can create a joint will to describe where they want their assets to go. While a will can eliminate ambiguity about how your family should divide up your possessions, your will still must go through probate court. This process involves a judge reviewing your will and distributing possessions accordingly.
Beneficiary Designations vs. Wills: Key Differences
Beneficiary designations and wills share specific characteristics, such as helping you define who should receive money from your estate after you pass away. However, they aren’t identical, and understanding the differences can help you create a thorough estate plan:
A beneficiary designation is for one asset. Beneficiary designations apply to specific accounts and products, including life insurance policies, annuities, brokerage and retirement accounts. Meanwhile, your will describes your entire estate, including assets with designated beneficiaries.
Specific companies require beneficiary designations for their products. On the other hand, a will is a document you voluntarily create.
Beneficiary designations can override intentions stated in your will. For example, suppose your child is the primary beneficiary for your 401(k), but you state in your will that you would like the money to go to your sibling. In the event of your death, the money would go to your child.
Wills aren’t necessary for beneficiary designations to kick into action. On the other hand, say you don’t have any financial products with beneficiary designations. In this case, passing away without a will means your relatives and the court will distribute assets without any guidance from you.
Does Beneficiary Designation Overrule a Will?
A beneficiary designation from an insurance product or financial account overrules wishes you state in a will. Wills are malleable documents, subject to interpretation from probate court and contestable by family members demonstrating an interest in your estate (even if you don’t list them in your will).
Conversely, your contract with a financial institution creates an unimpeachable beneficiary designation. The financial company and relevant laws ensure your beneficiary will receive payment, even if other family members try to claim the benefit.
Can an Executor Override a Beneficiary?
Your executor is legally bound to fulfill your will’s conditions even if they are contrary to the wishes of the beneficiaries listed in the will. However, the executor can’t change or violate beneficiary designations of your financial products. In other words, your beneficiary will receive assets from the designations of financial products despite attempts from an executor to fulfill your wishes.
Do You Need a Will?
Although it doesn’t create unbreakable conditions for your assets, a will is an essential part of your estate plan because it expresses your intentions for your possessions. A will by itself may not be sufficient for ensuring your beneficiaries receive assets in the manner you wish. Still, it’s a foundational legal document that guides your executor and the probate process after you pass away. You might need a living trust and beneficiary designations to supplement a will – but the will is the centerpiece for declaring your final wishes.
Bottom Line
A beneficiary designation is mandatory for insurance policies, annuities and retirement products. It defines a specific beneficiary that a will can’t change. On the other hand, a will contains your desires for your entire estate. While a will usually contains numerous beneficiary designations for your possessions, a beneficiary designation for a financial product will supersede your will in the event of a discrepancy. Therefore, it’s an excellent idea to ensure the beneficiary designations within your will align with the designations of your life insurance policy and other financial accounts.
Estate Planning Tips
A financial advisor can help you create a thorough estate plan that accounts for various beneficiary designations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
An attorney is an excellent resource for creating a will. However, you can create a will online if you want to save money and feel confident doing it yourself.
Don’t forget to review and update your estate plan from time to time. Some experts recommend doing so every three to five years. Regardless of how often you update your estate plan and will, it’s especially important to take this step after major life events like having a child or inheriting money.
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