3 Things to Teach Clients About Beneficiary Designations

Designating a beneficiary, or beneficiaries, is an important part of a client’s estate plan. However, these decisions are sometimes made in a hurry and with little or no advice.

As a trusted advisor, you should share your expertise with clients to help them make informed decisions about beneficiary designations, while also giving them a better understanding of the overall estate planning process.

Backstory: Property and Wealth Transfer at Death

Property and wealth transfer at death can occur several ways, two of the most common being through probate and beneficiary designations. Both methods, conducted in conjunction with other estate planning documents a client may have (such as wills, trusts, and deeds of transfer) should also be coordinated with their existing estate plan.

A beneficiary is a person or legal entity  entitled to receive the proceeds of an estate, trust, retirement account, life insurance policy, or transfer on death account. Beneficiaries can be a person, several people, an organization or multiple organizations like a trust or charity.

Property transfer through probate involves a valid will or deed of transfer and usually requires the assistance of an attorney and involvement of probate court, which can end up being costly and fraught with delays. For our purpose, we'll focus on beneficiary designations and several client need-to-knows for making these decisions.

Lesson One: The Majority of Wealth is Not Distributed by Will

Beneficiary designations are an important part of a client's estate plan because they provide a mechanism for wealth transfer. In fact, some of the largest transfers of wealth made by Americans are directed by beneficiary designations and outside of probate. However, many benefactors tend to presume that their will is what distributes most, or all, of their wealth upon death.

A will only transfers probate property. Financial advisors and estate planners need to remind clients of this fact continually and give estate planning advice that includes considerations for assets they can transfer via beneficiary designation and outside of the will.

Some examples of assets that are transferable by beneficiary designation include:

• Life insurance
• Annuities
• Pensions
• IRAs
• 401(k)s

Once the client has a better understanding of assets that are transferable outside of the will, they can begin thinking about a beneficiary and any additional considerations.

Lesson Two: Beneficiary Designations Require Periodic Evaluations

In this business, an old beneficiary designation or inappropriate asset transfer can lead to the eventual impoverishment of an intended heir or entire family. To avoid this catastrophe, financial advisors should continually reinforce their client's planned wealth transfer structure and periodically suggest an audit of existing beneficiary designations.

Whenever auditing, changing or naming new beneficiaries, the client's overall estate planning objectives must remain top of mind. Some cases when an audit of beneficiary designations should be considered include:

• Divorce, whether the divorcees remain amicable or not
• Remarriage, especially when a blended family situation is involved
• Any time the client receives an employee benefit, asset or investment product providing the ability to name a beneficiary
• Whenever presented with a beneficiary designation form from an employer or financial institution

Lesson Three: Help the Heirs Prepare for Inheriting Wealth

When it comes to estate planning, good communication is the cornerstone of a healthy relationship, especially between clients and their heirs. Generally speaking, beneficiaries aren't legally required to be notified of their beneficiary status or if it changes. In some circumstances, silence is more appropriate, but this is a decision to make on a case-by-case basis.

Advisors should provide knowledge to clients and their heirs about how to claim the asset, what options are available, and possible impacts of each. This information can be as simple as indicating a payable-at-death financial account is transferrable to the heir by presenting a death certificate. Or in the case of life insurance, that the benefit can be received by filling out a claim form and mailing it back with a death certificate. Pursuing an advanced financial credential like the Retirement Income Certified Professional® (RICP®) is one way for financial advisors to strengthen their advice with regard to optimal beneficiary designation practices, specific asset transfer and the full scope of available options.

Engaging with an estate planning attorney for this type of information can be much more costly for a client than having the knowledge in advance. With a solid understanding of how beneficiary designations impact the entire estate plan, clients will be able to make the right decisions for themselves.

Estate planning is an important piece of a client’s financial solution, but it can be complicated. Proper estate planning depends on many variables and requires skilled, knowledgeable advisors who can execute a successful solution while maintaining the highest fiduciary standard of care.

Having comprehensive knowledge of a client’s finances, goals, and a deep understanding of the regulatory environment is crucial for estate planning professionals and financial advisors. To gain more expertise about issues related to estate planning, wealth management, and creating sustainable retirement income streams for your clients income read “Planning for Retirement in a Rising Tax Environment.”