What would happen to your cash and assets if you got in a terrible accident tomorrow? Not the most pleasing thing to think about, but an important question nonetheless.
People who are lucky enough to have assets to pass on to others have the right to decide who gets them. Those fortunate individuals are your beneficiaries.
If you own a home you’ll need to state who inherits it. If you have a life insurance policy or final expense insurance you’ll have to name a beneficiary who will receive compensation. If you have an IRA account, stocks or 401K you need to name a benefactor to take over the accounts. If not, next of kin will get all of your financial assets.
Choosing a beneficiary is no small decision. If it’s time to name a benefactor use the tips below to help decide who gets what.
Tip #1 – Always Name a Beneficiary
Even though the beneficiary may seem obvious (for instance, a spouse) you still need to document it. Never leave the benefactor section of financial documents blank. Be specific and clear by providing as much information about the intended beneficiary as possible.
Tip #2 – Know the State Laws Regarding Minors
In some states, law prohibits a minor from being a beneficiary. If this is the case in your state, you may need to name a trustee or guardian for beneficiaries of a certain age. For example, in New York only a minor over the age of 14 and a half years old can be the beneficiary on an insurance policy.
Tip #3 – Exercise the Contingent Beneficiary Option
Some insurance policies will allow you to name a primary beneficiary and a contingent beneficiary as a backup. It’s always best to name a contingent beneficiary anytime the option is given. It’s a safeguard in case the primary beneficiary passes away first.
Tip #4 – Ask Yourself Big Questions
Before you name a beneficiary it helps to envision the future after you’re gone. How would you want your affairs and finances managed? Who is the most likely to have the same goals and management style? Who do you think would put the money to good use over the long-term? Asking yourself these big questions can help reveal the best beneficiaries.
Tip #5 – Think About the Taxes
Money and assets that are inherited could be subject to taxes depending on who the beneficiary is. In most cases, assets that are passed on to a spouse are tax-free. However, any beneficiary can be hit with taxes if someone other than yourself purchases a life insurance policy in your name.
Tip # 6 – Consider a Person’s Current Financial State
It may help to consider how loved ones manage their own finances and spend money. After working hard for years to build up your assets the last thing you want is for an irresponsible beneficiary to squander it all.
Tip #7 – Balance It Out Among Multiple Beneficiaries
One way to prevent financial mismanagement of your assets is to split the proceeds among multiple beneficiaries. It’s a common practice for parents with more than one child. Just be careful to keep things balanced so there isn’t ill-will among family members.
Tip #8 – Keep Community-Property State Laws in Mind
There are nine community-property states that require a spouse sign a waiver giving up their rights to insurance benefits if someone else is named the beneficiary. Essentially, residents in community-property states need a spouse’s okay before they can name another beneficiary.
Picking a beneficiary can be stressful. It’s not everyday you choose to give another person your life savings or benefits you’ve earned after years of work. It’s a big decision, but keep in mind you can change the beneficiary at any time by updating your insurance policies and will. If only life had the same type of safety net.