Regularly reviewing your beneficiary designations will help make sure your assets go where you intend without legal complications and unintended outcomes.
When it comes to your estate plan, regularly reviewing and updating the designated beneficiaries of various assets — including retirement plans, life insurance policies, and annuities — may not be at the top of your to-do list. Rich Brown, senior trust advisor at Wells Fargo Wealth & Investment Management, has found that, for many people, it’s not on the to-do list at all. However, although it’s often overlooked, this aspect of wealth transfer should be an essential piece of your overall estate plan.
Why? “Keeping your designations up to date lets you confirm whom you want to benefit from your assets,” Brown says. “You want to make sure you always have someone designated who will fulfill your wishes and who won’t be financially burdened by the gift.” Beyond that, failing to revise your beneficiaries could have unintended consequences for both your assets and your loved ones.
Below, Brown dives deeper into the importance of updating beneficiaries and offers practical steps for avoiding common mistakes.
Four reasons to update your beneficiaries
Regularly reviewing your beneficiary designations helps make sure that your estate plan is on track and that the transfer of assets is both efficient and strategic. Here are Brown’s top four reasons to consider reviewing your beneficiary designations.
1. Tax laws change — often. When selecting beneficiaries, think about how tax laws could impact those beneficiaries’ financial obligations when they receive those assets. Brown refers to tax changes brought about by the SECURE Act of 2019: “Children who receive a qualified retirement plan as an inheritance now have only 10 years to distribute the entire amount, as opposed to their remaining lifetime.” He adds that revised tax codes under the Tax Cuts and Jobs Act of 2017, which are currently meant to sunset at the end of 2025, could be a reason to review beneficiaries sooner rather than later.
2. The needs of family members could change. Brown says this is often a question of whether equal is fair and fair is equal. For example, you could find yourself wanting to reconsider leaving an equal share to a beneficiary with special needs if the gift would mean that they lose government benefits. Similarly, an adult child who has accumulated their own wealth could prefer to avoid the tax burden of a large inheritance, which could instead be divided more strategically among other family members.
3. Life could get in the way. Milestone events such as marriage, divorce, births, or deaths could significantly impact your estate plan. Updating beneficiaries accordingly could help reduce complications for surviving family members and prevent assets from going to the wrong recipients (such as a former spouse or to the estate of a deceased beneficiary).
4. It simplifies the wealth transfer process. Updating beneficiary designations helps make sure your assets go where you intend. “For example, if a qualified retirement account has a beneficiary designation that doesn’t match the estate plan, the agreement in place directly with the account will supersede the estate plan,” Brown says. “So failing to update your beneficiaries could undo a lot of difficult, expensive estate planning.”
Who can help you review and update beneficiaries
Brown recommends working with trusted advisors to review your beneficiaries, whether your estate plan is simple or complex. “If you’re working with a financial advisor, they can help orchestrate updates and help prepare all the paperwork for you,” he says.
Brown also recommends working with estate attorneys, as identifying beneficiaries could involve legal decisions. “A financial team can help you navigate tax considerations, but you should ultimately get legal guidance for these legal documents,” he says. This is particularly important when trusts are involved.
Mistakes to avoid when reviewing beneficiaries
Brown recommends reviewing beneficiary designations every three to five years — or whenever major life events or tax changes occur. Here, he offers guidance to help in your planning.
Know which accounts require beneficiaries. Insurance policies and qualified retirement accounts such as IRAs and 401(k)s are the most well-known beneficiary accounts. But assets such as annuities and payable- or transfer-on-death accounts should also be reviewed. Brown says working with a trusted advisor can help identify all of your beneficiary accounts.
Establish contingent beneficiaries. A contingent beneficiary is someone who could inherit an asset if the primary and secondary beneficiaries either aren’t able to or choose to disclaim the gift. Adding this extra layer to your beneficiary designations could keep assets from getting tied up in probate.
Update beneficiaries after life events. Brown says people often update their estate plan after an event like a death or the birth of a child, but they fail to take the extra step of reviewing and updating beneficiaries. Aligning beneficiary designations with your estate plan is a way to alleviate stress and confusion for surviving heirs.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Wealth & Investment Management (WIM) provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Trust services are available through Wells Fargo Bank, N.A. Member FDIC and Wells Fargo Delaware Trust Company, N.A.
