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5 Reasons to Add Beneficiaries to Your Investment Accounts Now

Jan. 24, 2020
Investing, Personal Finance, Retirement Planning
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Losing a loved one isn’t just an emotional burden — it also carries an administrative load. There are flower arrangements to pick, eulogies to write and a stream of paperwork to sort through.

You can reduce that load for your own heirs by communicating your preferences about your assets clearly. Part of that means adding beneficiaries to your retirement and investment accounts. Doing so will help save your heirs time, money and energy when they need it most. Here’s why.

1. Your beneficiaries keep more money (and get it faster)

If your beneficiaries are already assigned to your investment or retirement accounts, the assets will pass to them. If not, they may have to go through probate, a legal process for settling an estate after someone dies.

Probate often involves going to a state court, which is the last thing your beneficiaries will want to worry about during a busy and difficult time. A typical probate case can last a year or longer, during which time your beneficiaries can’t access their inheritance. Going to court also means court fees, attorney fees, lost time and added stress — all things they’d rather avoid.

All told, depending on your state and the complexity of the estate, probate can eat up 0.5% to 5% of your estate, according to Riley Poppy, a certified financial planner and the founder of Ignite Financial Planning in Seattle.

2. It eases stress for your heirs

Taking care of this simple step can ease a heavy burden for your beneficiaries, so they’re not untangling your finances while they’re grieving.

“I think [adding beneficiaries is] really important,” Poppy says. “Part of your financial plan needs to be legacy planning and having your plan reflect your last wishes. It saves time, money and stress, and makes it really easy for your loved ones.”

Once an account provider is notified of the death of an account holder, the provider typically notifies beneficiaries, which can save heirs from having to locate accounts. The beneficiary will need to provide necessary documentation, like a death certificate, but that process is significantly cheaper and less time-consuming than probate. Transferring investment and retirement accounts to heirs who are listed beneficiaries typically costs no more than $30 (to obtain death certificates) and takes a month and a half to two months.

3. Beneficiaries can override your will

If you have beneficiaries listed, those elections will typically override your will.

That makes beneficiaries — up-to-date ones — extremely important. If you’ve been married twice, and you forget to change your beneficiary elections from your first spouse to your second, your money could go to your ex when you pass away — even if your will states otherwise. Unless you want your family situation to look like an episode of “The Maury Show,” it’s best to keep your retirement beneficiary elections up to date.

4. It’s a quick and painless process

Retirement account and investment account beneficiaries are different, but it’s easy to assign beneficiaries for both types of accounts.

If you have a retirement account, like a 401(k) or an IRA, your account will typically offer a beneficiary form within the account itself. You can select your beneficiaries when you create your account or revisit them later.

If you have a regular investment account, in order to make beneficiary elections, you’ll need to request a transfer on death form. You can also request TOD forms for bank accounts.

If you have a trust, you don’t have to worry about selecting beneficiaries, because by their very nature, trusts already have a clear, named beneficiary. So trusts allow their holders to completely avoid the possibility of probate.

5. You recently experienced a life change

After a big life change, like getting married or having a child, it’s important to update or add beneficiary elections right away. No one likes to think about an unexpected death — especially not right after a happy event — but it can happen, so it’s best to be prepared.

Keep in mind, there are some laws that govern leaving retirement plans to a spouse. For 401(k)s, for example, your spouse will typically inherit the account unless they sign a written consent form waiving their right to it. If you want to leave your 401(k) to your adult children, it isn’t enough to list them as beneficiaries — your spouse has to sign off.

In some states (called community property states) spouses can be entitled to half of the assets in an IRA — even if other beneficiaries are listed — unless you have written consent. Be sure to research your state’s laws to ensure your money goes to whom you want it to.

Estate planning can get complicated, so if you’re not certain of how things could unfold in the event of your death, have an estate planning attorney check your work.

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