You can transfer assets one way or both ways, but don’t confuse these two elements of an estate plan
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A beneficiary designation and a will are both estate planning options that can help pass along money and assets to your heirs. Assets with a beneficiary designation are payable on death to the named party, and are one type of asset that avoids probate, while a will is a legal document with its own set of instructions as to who gets your property.
You can and should use both as part of your estate plan, but take care to coordinate which assets should be distributed directly to a beneficiary and which are handled by your will. A beneficiary designation usually overrides the terms of a will and you can cause confusion by designating one beneficiary but then putting a different one in your will. Only 33.8% of people understand how payable-on-death accounts can be received by the designated beneficiary, according to our annual estate planning survey.
Assets with a beneficiary designation can avoid probate
A beneficiary designation overrides a will
A robust estate plan uses both a will and beneficiary designations to pass assets
Certain assets let you name beneficiaries who will receive those assets after you die. These assets are also called payable-on-death (POD) or transferable-on-death (TOD) accounts. POD accounts, like a life insurance policy or annuity, will pay out to your beneficiary after you die. TOD accounts, like a 401(k), IRA, or bank account, will transfer ownership to your beneficiary and they will take over management
In order for an asset to pass to the named beneficiary, you must complete the proper paperwork — a beneficiary designation form typically provided by the plan administrator or insurance company. If you can’t find it, you can contact the financial institution that holds the asset, and ask for the form. The beneficiary form will ask for information about your chosen beneficiary, like their contact information and Social Security number. You can also use this process to add or remove beneficiaries in the future if you wish.
A beneficiary can be a family member, organization, business or even a trust — which can be a good option if your beneficiary is a minor. You should make sure to review and update your choices as necessary, and you can even include a secondary beneficiary, also known as a contingent beneficiary, in case the primary beneficiary predeceases you.
Learn about how to choose beneficiaries in estate planning.
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The assets with a named beneficiary are non-probate assets, which will transfer directly to the person you’ve named. This is an advantageous and convenient way to leave an inheritance, since your loved ones can receive the money or assets with minimal court involvement. Typically when someone writes a will, its validity must be proven in court upon their death. This process, called probate, can take time and money (filing fees at the least, and attorney fees if there are issues, like someone who wants to challenge or contest the will.)
Learn how to avoid probate.
A will includes a list of assets and property and names of beneficiaries who should receive them. If you write that someone should get an asset in your will, but the asset already has its own beneficiary designation, the terms of the will can be ignored. For example, let’s say your will stipulates that your wife should receive the contents of your savings account, but you actually named your daughter as the beneficiary when you opened the account. When you die, your daughter gets the money in the savings account, because a beneficiary designation takes precedence over the terms of a will, which is why it is imperative to exclude any payable-on-death assets from your will.
See the full list of what you should never put in your will.
A last will and testament is a solid estate planning measure that everyone should have, even if their estate consists of assets with named beneficiaries. A will can pass along your personal belongings and possessions of sentimental value and also name a guardian for a minor child. You can get started on your estate plan with Policygenius.
If you fail to name a designated beneficiary for an asset, it will likely be inherited by your next of kin once it becomes part of your estate, unless the asset is used to pay off any debt.
There may also be tax implications if you don't name a beneficiary for an asset and it becomes part of the probate estate. For example, your estate may have to pay income taxes on a 401(k) plan. Increasing the value of your estate before someone inherits could potentially increase estate taxes or inheritance taxes, too. You should consult with a financial advisor if you have questions about taxes and retirement assets.
Learn more about taxes.
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