Wherever you are on your path towards financial independence, it’s important to think about what would happen to your financial accounts if you were unexpectedly pass away. It seems like a morbid thought, but planning for the well-being of your family is essential.
Even if you don’t yet have a spouse or children, thinking ahead financially is still important. It could smooth the way for any friends or extended family members who will deal with your affairs, should you die.
Obviously, this process involves creating the proper wills and trusts. But one more simple step could help your heirs avoid some problems: designating beneficiaries.
Even if all of your financial assets are properly distributed in your will, your heirs may get tied up in probate dealing with specific financial accounts unless you designate beneficiaries. The good thing is that you can easily add beneficiaries to most accounts, bypassing the harrowing (and potentially expensive!) probate process. The beneficiaries designated on your account will only need some basic paperwork to receive money left in that account following your death.
Not sure how to add these designees to your accounts, or even which accounts need beneficiaries in the first place? We’re here to help!
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Adding Beneficiaries to a Checking or Savings Account
You can add a beneficiary or a payable-on-death (POD) to most savings and checking accounts. Sometimes your bank will ask for this information when you’re opening a new account, but they don’t always. And sometimes you can’t add or change beneficiaries online.
If your bank has a brick-and-mortar branch, you may need to visit the personal banker with the beneficiary or with that person’s information, including address and Social Security number to add them to your account or change beneficiaries.
Dealing with an online-only bank or one that doesn’t have a location in your area? Call the bank directly to ask how you can designate beneficiaries for each of your accounts.
Unfortunately, some banks (including ING Direct) doesn’t allow accountholders to designate beneficiaries. If this is an issue for you, consider moving your money to another bank that does allow for a payable-on-death designation.
You can also address this bank specifically in your will or trust. Again, even a will or trust may not remove all the headaches associated with accessing a bank account’s balance after your death. But if you like everything else about your bank account, aside from the fact that it doesn’t allow for a payable-on-death beneficiary, you may not want to switch banks. In this case, just ensure that the bank account is covered in your will.
Beneficiaries on Investment Accounts
Brokerages and banks will usually ask for a beneficiary when you open an investment account of any kind. Even if you don’t plan to save massive amounts of money in any given account, be sure you designate a beneficiary right away. You never know how that account balance could grow between now and when you might pass away.
Plus, a small account balance gives you even more incentive to name a beneficiary. In the case of accounts with a relatively small balance, probate fees could eat up the entire account balance if you aren’t careful.
Related: Evaluating an Investment Portfolio
Policies like life insurance will obviously ask for a beneficiary right away, since their point is to benefit your heirs should something happen to you. Still, you’ll want to be sure that these policies are kept up-to-date with your recent beneficiaries.
What About Joint Accounts?
You might think about skirting around the need for a beneficiary by naming a joint account owner, instead. In some cases, this can be appropriate. For instance, if you and your spouse combine finances, it’s appropriate to have most of your basic checking and savings accounts in both spouse’s names, even if you actively manage most of the money.
Naming your spouse as a co-owner on your accounts usually makes sense, but naming another person as co-owner may not. For instance, adding an adult child to your account gives that child the power to withdraw from your account at any time, even before your death. Also, the co-owner will inherit your account upon your death, even if you’d prefer to name multiple beneficiaries.
Other issues to consider include credit issues on the part of the account co-owner. If your joint account owner gets into financial difficulty, creditors could come after the balance of your account, even if the co-owner has never contributed to that account.
Joint accounts could be a viable solution for skirting around probate issues in some cases, but there are plenty of potential dangers to consider, as well.
Compiling Your Financial Information
Of course, you can designate a beneficiary on every one of your fifteen different bank accounts. But that doesn’t do a whole lot of good if your beneficiary doesn’t even know about the accounts after your death. This is why it’s so important to keep a file — whether electronic or physical — of all of your personal financial information.
Maintaining a money binder is an excellent way to keep all of your financial information together, including account log-in information. Just having a list of where you maintain all of your accounts and who the beneficiaries for those accounts are gives your heirs a place to begin.
Changing the Beneficiaries
One thing to keep in mind is that you’ll need to keep your beneficiaries up to date. Any major life event, such as a marriage or divorce, or the birth or death of a child, means you need to look over your account beneficiaries to make sure they’re still accurate. Also be sure that your account beneficiaries are listed in the appropriate order. This is important if you, for instance, want to account to pass first to your spouse but then to your child if your spouse has also passed away.
When you’re changing the beneficiaries on your accounts, be sure to also change that beneficiaries in your will so that they match. Mismatches between your will and your account beneficiaries can create major hangups for your heirs! Whenever you update one, double check the other to ensure that it’s correct.
More Complicated Situations
As you move towards financial independence, you’ll begin to enter on to more complicated financial situations which might require true estate planning. After all, you don’t want to see all your hard work and careful planning go to waste when your beneficiaries are heavily taxed on what you leave behind!
Keep this in mind as you progress through your financial goals. If you’re well into the millions of dollars of assets, it’s probably time to do more than just designate beneficiaries and set up a basic will. At this point, you’re likely looking at trusts and other inheritance issues.
Still, though, even if you pull in a professional estate planner, you’ll have to take this step to ensure that all of your accounts are set up with beneficiaries that match your estate plan.
Published or updated May 23, 2017.