Why the Beneficiary Designation Is So Important

Dianne Harris
Dianne Harris
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If you contribute to a retirement account or own a life insurance policy, you’re probably aware of beneficiary designations. Beneficiaries are a form of estate planning and ensure that your assets are transferred to the right person, people, or entity, upon your death. Let's take a look at why these designations mean so much to your estate plan — and your legacy.

What is a beneficiary?

Simply, a beneficiary is a recipient of assets. To put it in more legal terms, a beneficiary is a person or entity that is named on a financial instrument or account to receive the property or asset at the death of the owner.

When you think about beneficiary designations, your life insurance policy likely crosses your mind but retirement, checking, savings, and investment accounts can also include beneficiaries in the form of either TOD (Transfer on Death) or POD (Payable on Death) designations. In South Dakota, there is even a formal "Transfer on Death Deed" format for real estate that you can utilize for estate planning purposes.

Beneficiaries do not have to be family members. They can be neighbors, siblings, partners, close friends, even institutions or charities. Assets can also be split among multiple people and entities, furthering the way you customize your estate plan.

Official designations supersede your will

One of the most confusing concepts is the relationship between your beneficiary designations and your will. Assigning beneficiary designations separate from leaving people assets in your will.

Beneficiary designations take precedence over what you’ve specified in your will or trust. For example, if you leave everything to your children in your will, but your ex-spouse is listed as the beneficiary on your accounts, your estate will go to your ex-spouse, not your kids. Even if your will was updated after the divorce to name your children, the beneficiary designation of each asset will dictate where that asset goes at your death.

Beneficiary designations are a form of estate planning and should be selected with careful intention. Including beneficiaries on an account is just like a contractual arrangement. Therefore, it is vital to review them often to make sure that your true intentions are in place. The last thing you want is for your valuable assets to end up in the wrong hands!

How TODs and PODs factor in

Utilizing Transfer on Death (TOD) and Payable on Death (POD) accounts puts you in control of where your assets end up and allow the assets to bypass probate. The assets in these accounts will go directly to the named beneficiaries regardless of what is stated in your will.

Transfer on Death is a special account that can be established for brokerage accounts, retirement accounts like a 401k or IRA, other investment accounts, and in some cases property. Once the account owner passes, all assets in the TOD are passed to the beneficiary without probate.

You can transfer an existing account into a TOD or establish a new one. Avoiding probate is a great benefit, but TODs can also beget complications with joint TOD accounts (multiple marriages and kids, or the owner can disinherit a beneficiary). You also have to be cautious about listing minor children as beneficiaries because most state laws prohibit minors from controlling assets or property.

Payable on Death is an arrangement to establish beneficiaries on bank accounts and CDs. The beneficiary can't claim the money while the account owner is alive, but after they pass, the account is automatically transferred, also avoiding probate. The key benefit with POD accounts is that there is an increased FDIC insured assets amount. For example, FDIC coverage can increase from $250,000 to 1.25 million if five parties are included between the owner and beneficiaries on the account(s). If you have multiple accounts at one institution, this could be a good benefit.

Update your beneficiaries frequently

Your beneficiary designations play a significant role in the distribution of your assets. You want to review your beneficiaries frequently to keep everything up to date — especially necessary when there is a life or death event within your family. We recommend reviewing your beneficiaries every 1 to 3 years to make sure everything is in place. This keeps you and your family on the same page and no surprises.

Take control of your assets

First Dakota National Bank's Wealth & Trust Department can help you organize your financial goals and guide you through the process of implementing your intentions using beneficiary designations or in some cases, suggesting other options.

The beneficiaries you have listed are the ones who will carry on your legacy, so it’s vital to treat this area with the utmost importance. If you have any questions about how to better secure your financial future, give our team a call at 605-333-8261.

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.