Reviewing your beneficiaries: A 5-step guide

Accounting for beneficiaries as part of your regular estate plan review helps ensure you’ve provided for their future.

Regularly confirming beneficiary designations are aligned with your broader estate plan may not seem urgent, but if you let something slide, the repercussions could be unfavorable for your loved ones. For example, many ex-spouses have received a surprise windfall due to a beneficiary designation that hadn’t been changed for years. Plus, beneficiary designations override a will.

To help ensure such designations are aligned with current realities, work through the following steps with a financial professional.

1.  Get a handle on your accounts

Insurance policies, pensions and retirement accounts, such as Roth IRAs, traditional IRAs and 401(k) plans and Health Savings Accounts (HSAs), usually ask for primary and secondary beneficiaries. Dig into the details of these accounts to confirm they indeed require beneficiaries, and note who you’ve named to receive the proceeds when you die.

For more complex assets or nontraditional investments, such as private equity holdings or specialty assets, you may need additional paperwork to set up beneficiaries. Make sure there’s a roadmap that estate executors can follow to all your holdings. 

2.  Run a family roll call

If it’s been a while since you updated your beneficiaries, consider how your family has changed over the past few years. What marriages and births have expanded your family’s reach? What deaths and divorces have occurred? How have dynamics and needs changed as the family has evolved and aged? As life happens, there’s a good chance your beneficiary designations will need updating.

When it comes to gifting to your current or future children or grandchildren, consider the idea that equal shares for everyone may not always be the fairest distribution. One son who has devoted his life to working at a nonprofit may get a different share of your estate than the daughter who became the CFO of a multinational organization. You may want to start communicating those differences now.

3.  Weigh the tax implications

Some distributions to beneficiaries are taxable events. Others are not. Federal rules on estate and gift taxes are a moving target, and individual states add a layer of complexity as well. If you don’t account for tax matters, your well-intentioned gifts could shrink considerably.

Starting early with your gifting may help you to make tax-beneficial yearly gifts to your family. These may be direct gifts, or they may be gifts into accounts you set up. Having a clear plan early may help minimize the tax burden your next generation will face — and that plan starts with knowing who your beneficiaries are.

It's also important to note that minors cannot directly inherit assets by law, so consult with an attorney about options for your younger beneficiaries.

4.  Align your entire estate plan

Beneficiary designations can play an important role in your overall estate planning efforts. Life insurance and retirement account distributions are generally settled outside of your estate and are frequently completed much quicker. Calibrating between these accounts and other assets can help ensure the execution of your entire estate plan meets your wishes and desires.

5.  Make modifications as needed

Armed with all the information you’ve pulled together in steps one to four, change beneficiaries as needed. Then record the updates to make the process smoother for next time.

A beneficiary review may be challenging both emotionally and logistically, but it’s an essential part of any estate checklist.

As you determine or review your beneficiary designations, consider these 7 common mistakes to avoid.