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Estate planning in our day and age is complex and usually involves many different elements. \u00a0While many people know that almost everyone needs \u201cthe big three\u201d documents – will, power of attorney, and health care proxy – the beneficiary designation issue has not received the attention it deserves.<\/p>\n
What is a Beneficiary Designation?<\/strong><\/p>\n 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. \u00a0The beneficiary would receive the asset without the need for a will or the completion of probate and estate administration.<\/p>\n Why Is This Important?<\/strong><\/p>\n There are many ways for this process to fail.<\/p>\n First, the assets for which a beneficiary designation is most important are pre-tax assets such as a 401k. \u00a0This 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. \u00a0In other words, the beneficiary would have to pay more in tax than they would have if they were simply the named beneficiary.<\/p>\n 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.<\/p>\n Second, it is important to keep these forms up to date so that they accurately reflect your wishes. \u00a0It 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.<\/p>\n