• Dave Gillespie

5 Considerations When Selecting a Beneficiary



by MARGARET MULDOON


You would think that executing an estate plan is the final step in the estate planning process — but there is still a very important decision to be made. Some assets such as life insurance, annuities, qualified plans and IRAs pass by contract to a beneficiary chosen (or not chosen) by the contract owner, and not via an estate plan (e.g., will or trust). So it’s also important to coordinate your beneficiary designations with your estate plan to help ensure that your plan is carried out how you’ve intended. The primary beneficiary is the person to whom the proceeds go first. Secondary or contingent beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary, or if the primary beneficiary disclaims — or refuses to accept — the asset or proceeds. Before you choose a beneficiary of one of these assets, keep the following 5 considerations in mind.

1. Name a primary beneficiary to make your wishes clear and avoid probate. If you don’t name a beneficiary of a life insurance policy, annuity, qualified plan, or IRA, then generally the default beneficiary is your estate. There are several downsides. These types of assets pass by contract and don’t have to pass through the probate process if a person or trust is named as beneficiary. If the beneficiary is an estate, the death benefit proceeds first must be paid to the person administering the estate (such as the executor, personal representative, or administrator), which means the proceeds are subject to the probate process. In some states, life insurance proceeds are also exempt from the claims of creditors when there’s a named beneficiary — but not when your estate is your named beneficiary. By naming a beneficiary of these assets (such as a spouse, heir, or trust), they can contact the plan administrator, custodian or life insurance company and begin the process of claiming the asset, without involving the probate court. Otherwise the process may be delayed if the estate is named as (or becomes) the beneficiary by default. In this situation, the executor, personal representative or administrator — once recognized by the probate court — must file appropriate paperwork with the issuing company to begin the process. For the heirs, this could delay receipt of the benefit. If the owner of the asset didn’t have a will, the process may take even longer, because an administrator of the estate must petition and be appointed by the probate court. When someone dies without a will, their state of residency determines the distribution of assets — and all or a portion of the assets may pass to someone other than who the owner intended.

2. Choose an adult as beneficiary. Minors can’t own property in the United States. If you name a minor child as the beneficiary of a life insurance policy, annuity, qualified plan or IRA, someone may have to petition and be appointed by the court to act as a conservator of these assets for the child. This process may be costly and time-consuming.

3. Review your beneficiaries after a major life event. Anytime you experience a life event, such as marriage, death, divorce, birth or adoption, you should review both the primary and contingent beneficiaries of your life insurance policies, annuities, qualified plans, and IRAs. Outdated beneficiary choices could result in unintended heirs or adverse tax consequences.


4. Coordinate with the estate plan. Your life insurance policies, annuities, qualified plans or IRAs pass by contract to the named beneficiary and not through a will or trust. Therefore, it is important to coordinate the beneficiary of these assets with your estate plan to ensure that all of your assets pass to your intended heirs. For example, if your will leaves all of your assets to your spouse if he or she survives you (or if not, to a trust for your minor children), the beneficiary of your life insurance policy should be coordinated with this distribution.

5. Name a contingent beneficiary. The contingent beneficiary of a life insurance policy, annuity, qualified plan, or IRA is equally as important as the primary beneficiary. If you and your primary beneficiary were to die simultaneously, the Uniform Death Act provides that your beneficiary will be presumed to have died first. By naming a contingent beneficiary, you avoid having the proceeds pass to your estate. Talk to your financial professional If you have any questions about whether your beneficiary designation is up to date, contact me. Note: State and federal laws change frequently and the information above may not reflect recent changes in the laws. You should consult with your tax and legal advisors regarding your personal situation. The material contained in this document is based on Penn Mutual’s understanding and interpretation of current law. Penn Mutual and its financial professionals and representatives may not give legal or tax advice. Any discussion of taxes in this document is for general information purposes only and does not purport to be complete or to cover every situation. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances. 3084574CC_MAY22

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