Designating one or more beneficiaries to inherit the contents of your estate is an important step in preparing your end-of-life plan. Beyond simply settling the distribution of your assets, beneficiary designations provide multiple benefits to your loved ones upon your death. Here, we’ll review these benefits and the role of beneficiary designations in your estate plan.
What Are Beneficiary Designations?
Beneficiary designation is a term that you may have come across in the context of estate planning and creating a will. As a recipient of some portion of your estate, beneficiaries may also be referred to as your heirs, inheritors, or legatees. Your beneficiary designations detail the individuals who you would like to be beneficiaries and inherit an asset after you pass away. Partners, children, and siblings are common beneficiaries.
When you pass away, your beneficiary or beneficiaries will receive an annuity, life insurance policy, the contents of a bank account, or another asset within your estate as detailed in your estate plan. The designation will detail how the asset is distributed to the beneficiary.
What Assets Can Beneficiary Designations Be Used For?
It’s important to note that you can’t list a beneficiary designation for every type of asset or property. Typically, this designation can only be added to assets like bank, retirement, and securities accounts, as well as savings bonds, life insurance policies, and stocks and bonds. There are restrictions on naming beneficiaries for vehicles and real estate talk to a Denver probate expert to learn more about these restrictions in the context of your estate plan.
Types of Beneficiary Designations
Payable-on-death (POD) and transfer-on-death (TOD) are the two main types of beneficiary designation. These types are similar, namely in that they facilitate a quick distribution process for the deceased’s assets. The main difference between POD and TOD beneficiary designations is the assets that they may be applied to.
Payable-on-death designations are specifically for bank accounts. With a POD designation for a bank account, the balance of that account can be liquidated and paid to the named beneficiary upon the death of the account’s owner. Additionally, with a POD designation, the named beneficiary won’t be able to access the account while the account holder is still alive.
POD designations are widely used and easy to set up. It doesn’t cost anything to add a POD designation to a bank account, and the beneficiary will simply need a certified copy of a death certificate and valid proof of identity to access the account upon the account owner’s death.
Transfer-on-death designations can generally be used for non-qualified brokerage and securities accounts. Some states will also allow TOD designations for real estate or vehicles. TOD designations may be used for real estate or vehicles in Colorado. This gives Coloradans greater flexibility in estate planning and a wider range of options for the distribution of their assets.
The Importance of Beneficiary Designations
Beneficiary designations provide several important benefits as an element of your estate plan. These key benefits include:
Ensure That Your Assets Fall Into The Right Hands
On a basic level, beneficiary designations help ensure that your assets are distributed according to your wishes. Without a thorough estate plan and up-to-date beneficiary designations, you run the risk of your asset distribution being determined by a court.
Preventing Taxes on Your Assets
Without beneficiary designations, your assets may become taxable as soon as five years after the date of your death. This can place an added financial burden on your beneficiaries and keep them from receiving the full amount of your assets.
Creating beneficiary designations provides distinct tax benefits for your loved ones. As designated beneficiaries, your loved ones can withdraw money from your account, life insurance policy, annuity, etc. over time, rather than all at once. This provides the option to grow the accounts as tax-deferred assets, as with a traditional IRA.
Beneficiary Designations and Avoiding Probate
Beneficiary designations are an invaluable component of your estate plan. Maintaining a complete up-to-date estate plan can ensure that your beneficiaries aren’t required to go through probate. The probate process is often a lengthy one and may require legal assistance. You can take steps to spare your loved ones from this added hurdle after your death – adding beneficiary designations to your estate plan is one of those steps.