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The Importance of Beneficiary Designations

Estate planning in our day and age is complex and usually involves many different elements.  While many people know that almost everyone needs “the big three” documents – will, power of attorney, and health care proxy – the beneficiary designation issue has not received the attention it deserves.

What is a Beneficiary Designation?

Some assets you may hold, such as a bank account, 401k, or life insurance policy, allow the holder to designate a beneficiary for the account to inherit the account without going through probate.  The beneficiary would receive the asset without the need for a will or the completion of probate and estate administration.

Why Is This Important?

There are many ways for this process to fail.

First, the assets for which a beneficiary designation is most important are pre-tax assets such as a 401k.  This is because failure to name a beneficiary means the asset is distributed through the will, which can result in negative income tax results for the recipient.  In other words, the beneficiary would have to pay more in tax than they would have if they were simply the named beneficiary.

For many people these days, a significant amount of their wealth is held as 401k or IRA accounts. It is crucial to pass these through to your heirs correctly to avoid extra tax.

Second, it is important to keep these forms up to date so that they accurately reflect your wishes.  It is common to forget about an old 401k from a previous employer and neglect to update the form, resulting in the distribution of the funds to someone you did not intend.

Third, other financial assets can also have beneficiary designations, that do not necessarily affect the tax.  However, the named beneficiary on the form takes precedence over the beneficiaries named in the will.  Coordinating the beneficiary designees and your probate estate, reflected in the will, can be especially important if different assets are supposed to go to different beneficiaries for different reasons.

My Office Can Help

Feel free to contact the Law Office of Michelle Fine for assistance in this crucial area of estate planning.

Call us today to make an appointment at (201) 773-8914.

Disclaimer: The information in this newsletter is for general information purposes only. Nothing on this or associated pages, documents, comments, answers, emails or other communications should be taken as legal advice for any individual case or situation. This information on this website is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.