In this month's Monthly Financial Jargon series, we’re addressing a term that holds a great deal of importance when it comes to ensuring your funds end up in the right hands when necessary: beneficiaries. We are often surrounded by many of these individuals during the holiday season, making this time of year a great reminder to evaluate your current elections and enact any necessary additions or changes – adding a new child, grandkids, or a son- or daughter-in-law, for example.
Electing beneficiaries involves considerable implications for one’s finances and loved ones, and people frequently overlook the importance this term deserves. Your beneficiary or beneficiaries are who will receive your assets upon your death. Properly naming your beneficiaries is the single most important action you can take to ensure your assets are passed onto the right people when you are no longer here. You can name any person or entity as a beneficiary of a trust, will, life insurance policy, annuity, and other financial accounts, but remember that you have to name beneficiaries for each account and policy separately.
There are two types of beneficiaries: primary and contingent. A primary beneficiary is the individual or entity who will first receive benefits upon an account holder’s death. A contingent beneficiary is an individual or entity that is second in line to receive benefits. In other words, the contingent beneficiary only receives assets if he or she outlives the primary beneficiary or if the primary beneficiary refuses the inheritance or cannot be located. An individual can name multiple primary and contingent beneficiaries; however, he or she must designate what percentage of the account should be allocated to each party or risk having the funds doled out equally.
In addition to naming primary and contingent beneficiaries, an account holder will choose if the beneficiaries are “per capita” or “per stirpes.” These designations come into play if a beneficiary predeceases the owner of the assets. Per capita means that the share of the assets intended for the deceased beneficiary will be equally distributed to the other beneficiaries, so that all living beneficiaries receive equal shares of the assets intended for the deceased beneficiary. With a per stirpes designation, the inheritance intended for the deceased beneficiary is distributed to each of the deceased beneficiary’s heirs equally; in other words, the funds go down “the line” of the family tree to the deceased beneficiary’s next family members. This designation is used when an account owner wants to ensure the funds intended for the deceased beneficiary still pass on to that individual through his or her children. That being said, the per stirpes designation is used more commonly in estate planning because it covers the typical family circumstance.
All in all, remember to periodically review your beneficiary elections across all of your accounts and policies to ensure your elections accurately reflect any major life events or changes. This is especially important because in most cases, beneficiary designations of insurance policies and accounts like 401(k)s and individual retirement accounts (IRAs) trump the designations in a will. If you do your due diligence and name your beneficiaries properly, your beneficiaries will be able to receive the assets intended for them directly without having to deal with the courts and a probate process that could leave your assets in the hands of the wrong people. Holiday gatherings with family members, friends, and loved ones serve as helpful reminders to reflect on your beneficiaries across all of your accounts to ensure you are aware of and confident in your elections for the new year.
Monthly Financial Jargon: The world of finance and investments is notorious for its extensive use of jargon. With a goal to enhance financial literacy and make the world of money more transparent, we have our “monthly jargon” articles that focus on debunking financial terms that are often used sans explanation.
Questions and/or interested in how this applies to your financial life?
Email us here: info@afsfinancialgroup.com.