Benefits of Designating Beneficiaries on Investment, Bank, and Retirement Accounts

Legal Article

Benefits of Designating Beneficiaries on Investment, Bank, and Retirement Accounts

One of the most basic yet important actions you must take when creating your estate plan is to assign beneficiaries to your investment, bank, and retirement accounts. A beneficiary is a person or entity (such as a charity) that receives a beneficial interest in something, such as an estate, trust, account, or insurance policy. By designating beneficiaries before you pass away, your financial accounts will avoid probate.

What is Probate?

Probate is the court proceeding where a will is verified, and an estate is administered according to the terms of the will. Probate is also used where no will exists, in which case an estate will be administered under the terms of the state laws where the person resided. The process includes the collection of assets, the liquidation of liabilities, the payment of taxes, and the distribution of property to heirs.

While probate proceedings differ depending on the state, in most cases, probate will last between 6 – 12 months. Further, if assets must go through probate, an estate will incur attorney and court fees—adding more stress to your heirs’ already hectic lives.

The easiest way to avoid probate is to designate beneficiaries on financial accounts when creating your estate plan. The reason why assigning beneficiaries is so important is that when a bank or financial institution receives notice of your death, that institution will notify the beneficiaries of the account holder’s accounts. However, the main benefit to designating beneficiaries is that they will receive documents from the bank or financial institution that they can fill out to claim your assets. While your beneficiaries will also have to provide a death certificate, this process is much faster and cheaper than probate.  

Where to List Beneficiaries and Transfer Rules

Unfortunately, simply listing beneficiaries in your last will and testament will not avoid probate. Instead, to avoid probate you must put beneficiaries on your investment, bank, and retirement accounts, as these will trump the beneficiaries that you put in your will. This is an important step to understand as too often people do not update the beneficiaries on their financial accounts and then these assets go to an ex-spouse or former friend.

The transfer rules differ slightly when using retirement accounts such as a 401k or IRA. In these cases, you must specifically assign a beneficiary to these accounts. While most people will assign a beneficiary when first opening an account, you can add or replace beneficiaries up until you pass away. However, be aware that constantly changing your beneficiaries could force these assets into probate if you do not include a beneficiary designation.

When dealing with investment accounts, the most common beneficiary designation is a transfer of death form (“TOD form”). While a transfer of death form is popular, creating a trust is the better option as you can list all your beneficiaries and still avoid probate. 

Contact our DC Attorneys for More Information

It is vital that you designate beneficiaries on your bank, investment, and retirement accounts to avoid probate. For more information on the benefits of designating beneficiaries on investment, bank, and retirement accounts, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding probate law, check out our blog.