Nick Hymanson, a financial planner who is also part of our team, joined us on our latest podcast to discuss something very important: beneficiary best practices. If you work with us, you know that this is something that we have covered during our financial planning strategy meeting.
What is a Financial Planning Strategy Meeting?
In the financial planning strategy meeting, we cover:
- How your accounts did this past year
- Beneficiary updates
- Daily living changes
- Expenses and income
We look at your financial plan as a whole during the strategy meeting. A lot of people think that the most important part of retirement planning is the end goal, but if you don’t know where you are right now, it’s challenging to navigate your way to retirement.
You need to know your milestones ahead and what to do with Social Security, Medicare and your estate plan.
Your estate plan is where beneficiaries really come into the equation. If you have a “will,” you may assume that you have everything in order and you know who is getting what. The problem is that you have a variety of other accounts that have beneficiaries listed, such as your 401(k), IRA, life insurance and even your bank accounts.
When the terrible time comes and you need to put the estate in process, proper beneficiaries on your accounts will make the lives of your heirs much easier.
What We Do to Prepare Before Discussing Beneficiaries with Our Clients
Our team reviews all your investment accounts and will call insurance companies to verify:
- Primary beneficiaries
- Contingent beneficiaries
- Percentage allocations
You may have multiple people listed as a primary or contingent beneficiary, or you can have one or two. We’ll gather information on all your financial and insurance account beneficiaries and separate them by account to make it easier to determine who is the beneficiary on what accounts.
We then present the accounts in the meeting to help you understand if your account needs to be updated.
Why do we review beneficiaries annually?
Of course, we have a lot of real-life examples of accounts that people seemingly forget to update during crucial life moments.
- One client got divorced and didn’t remember to fix all the beneficiaries. It doesn’t matter who he is married to today. If he passed, the account would have gone to his ex, even though he is remarried.
- Someone has a child who is in a lawsuit, so maybe you don’t want money to go to this individual based on the current circumstances.
A quick, annual review of your beneficiaries can help you better manage them because life changes can impact who you want to be named as a beneficiary on your accounts.
Common Example of Husband and Wife
Couples who have an individual account will, in most cases, have their spouse being 100% beneficiary of their accounts. If the person isn’t alive when the other person passes, the account would then go to the contingent beneficiary, who can be one or more people.
For example, if you’re married and leave your wife as the primary beneficiary and she passes before you, the contingent beneficiary would be “next in line.”
Joint accounts work a little differently.
On joint accounts, you’re both co-owners of the account, but you can have beneficiaries listed on the account.
Spouse and Three Kids
While you’re free to do as you wish, it’s most common for a person to leave their spouse as the primary beneficiary of their accounts. You should also list your kids as contingent beneficiaries so that if your spouse is no longer living, the account will go to your children.
It’s most common to offer an even percentage to each child, in this case, 33.33% share to each of the three children.
In certain cases, one of the children may receive 0.01% extra to make an even 100%.
Spouse and Two Kids Who Each Have Children
Every scenario is a bit different, and we really want to illustrate the importance of following beneficiary best practices. If you’re like most couples, you’ll:
- Name your spouse the primary beneficiary
- Name your children as contingent beneficiaries
Let’s assume that each of your children has a child, so you have two grandchildren. Your eldest child dies. What will happen to your grandchild? Does all the account go to the sole, living child?
You can put measures in place that allow you to pass the funds to your grandchildren. You can even pass the funds to children who may not be born at the time of naming your beneficiaries.
A strategy to use is called Per Stirpes.
What Per Stirpes does is allow for the funds, which you name for Child 1, to flow down their family tree if they pass away. You don’t even need to list the grandchildren on the account when using per stirpes.
Per capita can also be used, which means that the account goes to your kids only. In this case, if you have two kids and one passes, the other child will receive 100% of the account. You can also opt to give one child 75% of the account or 10% – it’s up to you. Certain clients opt to do this when one child makes significantly more money than another or they have a medical condition.
Children do have a right to disclaim their inheritance, which, if the benefit goes down the lineage, can have its tax benefits. Perhaps your child wants their children to inherit the money, so they disclaim their portion, and it goes to your grandchild.
If your grandchild doesn’t make any money or is in a lower tax bracket, this can be beneficial.
Annually, you need to review and update your:
Major life changes are a good time to review these documents, too. If you get married, divorced, have a child or grandchild, it’s a good time to look through your beneficiaries and be sure that everything is in order.