Naming beneficiaries on your investment accounts may not provide you with excess returns, but it’s still a critical element of a comprehensive financial plan.

Many people get so caught up in seeking the next Amazon for their portfolio that they neglect what would happen to their assets if they passed on suddenly. In fact, account titling and beneficiary designations can help relieve an already-stressful situation for your heirs when it comes time to divide your assets.

But, in order to make the process as easy as possible, you should approach the process with care.

This article will cover the basics and mechanics of how the transfer of property to beneficiaries works. Thus, you can make sure your estate plan is comprehensive and well-founded when your time comes to pass on.

Before we continue, Financial Professional wants to remind you that all materials in this article are educational in nature. Estate-related situations can be very complex and laws vary by region. It may be wise to consider the help of an industry professional when it comes to estate- and tax-related decisions. 

If you don’t yet have industry professionals handling your portfolio, we can help! Check out Financial Professional’s investment marketplace, where we partner with some of the best in the business to help find the right investment for you. 

Why Beneficiaries? 

The primary reason to name beneficiaries on your investment accounts is to control your money even after you pass.

What happens to your assets if you die unexpectedly and you don’t have beneficiaries or TOD (transfer on death) designations on your accounts?

The technical answer: it depends.

Generally speaking, these assets become subject to your state’s probate process. While different states have different probate processes, they’re easy to avoid if you are proactive in naming beneficiaries before you pass.

Certain states, like California, are notorious for their especially arduous probate court proceedings. Often times, the process eats into your heirs’ time, and can also cost a fair amount of money.

By simply naming beneficiaries to your accounts, you can ensure your heirs breeze through the process quickly – or avoid it altogether.

Why?

Legally, official beneficiary designations tend to supersede probate proceedings, unlike a simple will. While a will is a helpful estate planning document, it is often subject to probate court in most cases.

By listing beneficiaries on your accounts, however, your assets can be distributed without too much delay upon your passing. This can save a lot of time and further grief for the people you leave behind.

Two Types of Beneficiaries

Fundamentally, there are two different types of beneficiary designations you can elect when formally assigning heirs to your investment assets. These are per capita and per stirpes.

Each designation comes with its pros and cons, and it’s important to place careful consideration on which designation you choose. You should also consider how each fits into your estate plan as a whole.

Let’s cover these designations in greater detail.

Per Capita 

Assets distributed on a “per capita” basis go to all currently living heirs that you list as a beneficiary on the account(s).

For example, let’s say that you designate 2 beneficiaries per capita with a 50/50 split of your assets when you pass.

If you were to pass away and both beneficiaries were alive at the time of your death, your assets would then be divided 50/50 between them. This is the simplest form of beneficiary designation.

What if one of your beneficiaries is not alive when you pass?

Keeping to the above example, the one living beneficiary would receive the entire distribution of your property. (Keep in mind that you can also name a trust as a beneficiary).

You can also name “contingent beneficiaries” in the case that one of your beneficiaries is not alive when your assets are distributed. This is not the same as a per stripes distribution, as we’ll discuss next.

Per Stirpes 

“Per stripes” has a more generational focus. Instead of the assets going to surviving heirs, which belong to the same generation, per stirpes distributions can skip a generation.

Per stirpes designations typically include the transfer of assets, which originated from grandparents, to their grandchildren. 

To make things more clear, let’s go over an example. 

Let’s assume you have two children: Mary and John. John has children. Mary does not. Because Mary does not have children, you are more concerned about leaving assets to your grandchildren, John’s children. 

If you were to be survived by both Mary and John, your assets would be distributed to them however you originally intended. 

However, let’s say that Mary survives you, but John does not. If the beneficiary designation was “per capita”, Mary would receive 100% of the inherited property.

However, if you chose the per stirpes designation, you could dictate that John’s children inherit the property you originally intended for John. 

Assigning Beneficiaries 

As it relates to investment accounts, most financial institutions have paperwork that allow you to designate beneficiaries on your accounts. Typically, the only information these institutions require includes:

  • The beneficiary’s name
  • Their date of birth
  • Their social security number

When you establish a new savings or investment account, such as a 401(k) or Roth IRA, this is one of the first things you should do. More often than not, the process is relatively quick and painless.

As it relates to other forms of property, a will can help you designate how the executor of your estate should distribute the assets. 

Trusts are legal entities often drafted and created in such a manner that distribution of property is structured. The structure of a trust is decided by the grantor (the creator of the trust).

Reviewing Designations 

As part of your annual financial review, you should examine the titling and beneficiary designations associated with your accounts and property.

After all, life is not stagnant. When life changes, your circumstances and priorities will change, too. In some cases, this may mean you want to adjust your accounts and designations accordingly.

Working With Professionals 

If your financial situation is not very complex, odds are that you may not need a whole lot more than a simple will and proper beneficiary designations on all of your property. 

However, if your situation is complex, it may be worth consulting professionals regarding your estate plan. 

Those with substantial amounts of assets in various locations may want to consider drafting an estate plan that addresses:

  • Trust language
  • Taxes
  • Estate, generation-skipping, etc
  • Beneficiary Titling

If you are currently working with a financial advisor or planner, it would be wise to get them in the loop with other professionals. Having all of your resources communicating and connected will make the process go that much more smoothly.

A Final Word on Beneficiary Designations

Beneficiary designations are often overlooked as people focus on growing their asset base. While building wealth is important, you’re going to want to have some control over how your asset distribution after you pass.

Proper account titling and beneficiary designations can go a long way and can save your heirs time, grief and money. 

Consider your own financial and estate planning picture when adding beneficiaries to your property. Remember: you can always change your beneficiaries down the road.

Just make sure you do what you can to avoid probate court at all costs. 

Have questions on beneficiary designations? Let us know!

Jose Hernandez
Jose Rafael Hernandez is known as "The Millennial Money Mentor" on social media. He and his family are immigrants to the United States from Venezuela. The unique challenges that he faced at a young age taught him the real value of money and its importance in life. Jose studied finance at Mercer University, where he also competed in Division 1 Baseball. After his athletic career, Jose began his professional career in the finance industry. He started his career as a wealth management advisor for one of the top Investment Advisory firms in the US, where he was responsible for just north of $20mm in AUM. Jose currently holds the Series 7 and 66 licenses. Jose decided to leave the firm so he could have the freedom to create his brand on social media, geared towards educating millennials in the areas of personal finance and investing. His mission is to leave a positive impact on others while building his own legacy and providing for his family.

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