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What are Beneficiary Designations and Why are They Important?


When estate planning attorneys ask for a full accounting of a client’s property ownership, it is not so we can see how much money the client has or that we are snooping. We need this information so we can review and consider each asset and determine the best way for it to be transferred at death. In many cases, and especially in a progressive nonprobate, transfer-at-death state such as Colorado, the majority of a person’s assets can be transferred outside of probate court. This is not only efficient and time-saving, but considerably reduces the cost of will administration. We can achieve this result by understanding the value and importance of beneficiary designations.

Every custodial account holding our monies and other assets, like stocks and bonds, typically requires the owner to designate in writing who will inherit the asset upon their death. These are called beneficiary designations. These designations allow us to fill out a form with the financial company holding the asset to name the person (or otherwise known as beneficiary or beneficiaries) who will receive these proceeds upon our death. Assets such as retirement accounts (401(k)s, IRAs, 403(b)s and similar accounts), life insurance proceeds and annuity accounts all pass to heirs by beneficiary designation. Additionally, many financial companies, like brokerage firms and banks, allow you to name beneficiaries on non-retirement accounts, which are known as transfer on death (TOD) or payable on death (POD) accounts.

In a typical probate proceeding, the personal representative for the estate (the person to whom you have given administrative authority in your will) will strive to identify, inventory, and collect all the decedent’s property, which may require time and investigation. If property is illiquid (i.e. not cash), then the personal representative may need to work with experts and appraisers to put values to each item.

There may also be a need to sell some assets to cover the costs of administering the estate, repaying creditors, or covering estate taxes. Court approval is necessary for execution of each of these steps. With this, one might see how bequests might not be paid to heirs immediately after the death of the decedent. Probate could possibly take months or longer to settle the estate and heirs would wait. But heirs named as beneficiary designations for the decedent’s accounts could receive distributions directly from the custodians of the monies without probate involvement.

Simply, the transfer of monies through beneficiary designation avoids probate. Importantly, these designations can authorize direct payment of our largest assets, including bank accounts and retirement account. As a result, it is critically important to keep your beneficiary designations up to date and correctly naming those heirs of your choice. There are many life circumstances that might necessitate a change of a beneficiary designation:

· Divorce;

· Remarriage;

· Death of Spouse;

· Death of a Beneficiary;

· Change of mind;

· Desire to gift to charity; or

· Birth of children.

Any estate planning that you undertake needs a thorough review of your beneficiary designations and your rights. Let us know how we can help you plan your estate to transfer your treasures and property to your chosen heirs.

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