Beneficiary Options, Questions, & Tips
Setting up beneficiary designations effectively ensures that your assets are passed on according to your wishes. Elsewhere, we have written extensively about the power of beneficiary designations and how certain beneficiary designations affect things like required minimum distributions (RMD). In this post, I want to cover common options, answer questions you might have, and provide you with a list of tips we follow with our clients. Almost every financial asset you own can have a beneficiary set. As always, we recommend you speak with a qualified estate planning attorney to get advice on the best choice for your situation.
Beneficiary Options
Primary vs. Contingent
Your first option determines the order in which your descendants will inherit your property.
Primary Beneficiary
The primary beneficiary is your first choice to inherit an asset (life insurance policy, retirement account, bank account, etc.). They will receive the account’s proceeds upon your passing automatically. You can name one or more depending on your personal situation. If no primary beneficiary is still living at the time of your death, the asset passes to your named contingent beneficiary.
Contingent Beneficiary
The contingent beneficiary only inherits an asset if all the primary beneficiaries have predeceased you or they otherwise disclaim the inheritance. For example, if you name your spouse as the primary beneficiary but they pass away before you, your contingent beneficiary (typically a child or sibling) would receive the asset.
Per Stirpes vs. Per Capita
The second option to consider is how you want an asset apportioned to the surviving beneficiaries you chose or their descendants if one of your designated beneficiaries predeceases you.
Per Stirpes
Per stirpes is Latin for “by branch,” meaning each “branch” of your family receives the portion left to them. If you’ve tagged your beneficiaries with per stirpes and one of them dies before you, their portion would pass down to their own children (not spouse). A perfect example is if you have two children named as beneficiaries, but one predeceases you. This approach sends their family tree their share of your estate.
Per Capita
Per capita means “by head” and causes assets to be divided equally among only the surviving beneficiaries. That means, using the same example above, with one of your children predeceasing you, their share would not go to their descendants. Only the surviving current beneficiaries receive the portion of the asset left. This approach potentially leaves a branch out from having a share of your estate.
TOD and POD
An often-missed beneficiary option is most closely associated with investment and bank accounts. Did you know that you can list a Transfer On Death (TOD) beneficiary, typically on a taxable investment account, or assign a Payable On Death (POD) designation to your checking and saving accounts? Both TOD and POD afford clear, direct instructions for asset transfer and avoid probate. Avoiding probate reduces legal costs and quickens the distribution to your heirs.
Your Burning Beneficiary Questions Answered
Now that we have some terms and options defined, let’s answer some questions that are likely on your mind.
Who Can I Name?
It’s completely and totally up to you in most cases. The only exception is with some pension assets if you are married. In those cases, your spouse controls the beneficiary, and you can only change them with their consent. Other than that, the ball is in your court if you own the account or life insurance policy. You can choose individuals, a trust, or organizations you want to support as your designee. When providing the information to the account custodian, give them as much detail as possible (legal name, contact information, Social Security number) so there is no ambiguity.
What Happens if I Don’t Name a Beneficiary?
Without providing a designation, your asset is not lost to a black hole but becomes part of your general estate and will be included in the probate process. This is where a court determines who gets what according to state law and a judge’s decision.
This is also why it’s important to name both primary and contingent beneficiaries and specify per stirpes if you want assets to pass automatically to a named beneficiary’s family tree. Having contingent beneficiaries reduces the risk of assets going in a direction you didn’t intend and minimizes confusion for loved ones while they grieve.
What If My Will Says One Thing, But My Designations Say Something Else?
You may say, “I put it in my will.” Unfortunately, that’s not adequate. Beneficiary designations trump what your will says because those designations are a legal contract. It’s best if your will and beneficiary designations sing the same song to, again, minimize confusion for your loved ones. Sometimes that doesn’t happen so it’s good to know how it’s all going to go down if any discrepancy arises.
What If I Name a Minor?
When naming minors as beneficiaries, special considerations come into play. You’ll want to talk with a qualified attorney for sure. Minors typically cannot directly inherit or manage assets, so any funds left to them would be managed by a custodian or trustee until they reach 18 or 21 (depending on state law). Why is that? Minors don’t have the legal capacity to contract for anything other than life essentials, like buying groceries. Knowing that, identifying a guardian for your minor children in your will (the only place you can do that) is essential. Choose someone who is financially responsible and will follow your intentions. And don’t skip the step of getting their buy-in first!
How Will My Assets Pass to My Descendants?
Choosing between per stirpes and per capita depends on your personal preference for distributing assets across generations. You might make different selections depending on one asset vs. another. The choice can be unique and distinct depending on what you want to happen. If you choose nothing, you are making a choice. The investment account paperwork I’ve read has a default designation, so you should understand what each custodian will do if you don’t specify.
Intentionally making a choice removes the guessing game. If you want to ensure that each family branch receives its portion regardless of who survives, per stirpes is the way to go. If you prefer an equal distribution among living beneficiaries only, then per capita may be a better choice. This might come into play if you wanted to leave your part of the generational homestead to your siblings and ensure it stayed in your siblings’ generation for the time being.
How Often Should I Update Beneficiaries?
The good news is that you can change the beneficiaries of financial assets at any time. All you need to do is contact the relevant custodian or legal authority (e.g. county recorder, secretary of state, etc.) and submit the required legal forms. We help our clients submit paperwork for accounts we help manage, and the attorneys we recommend have this as part of their process when they issue new or updated estate documents for you. Be sure to update beneficiaries in the following situations:
Major Life Changes (e.g. marriage, divorce, or the birth of a child)
Death of a Beneficiary
Acquiring New Assets
On a Regular Basis (even with no major life events, every 3 to 5 years)
Final Thoughts and Best Practices
We’ve made it a point to include beneficiary discussions with our clients during every financial planning review. Here are the five leading strategies we implement with you:
Identify where you are missing both primary and contingent beneficiaries
Educate and help you select per stirpes or per capita
Remind you to update beneficiary choices whenever you have a life-change
Add beneficiaries any time you open a new account, buy a new policy, or start a new job
Highlight the need for POD designations on bank accounts that hold significant balances
If you’re feeling moved to get this part of your financial house in order, book a call with us. We specialize in walking our clients through what they need to do. It might seem like a mundane task, but I can promise you that your loved ones will be glad you took the time.
This commentary reflects the personal opinions, viewpoints, and analyses of The Dala Group, LLC employees providing such comments. It should not be regarded as a description of advisory services provided by The Dala Group, LLC or performance returns of any The Dala Group, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The Dala Group, LLC manages its clients’ accounts using various investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
