When creating an estate plan, one of the most important decisions is choosing beneficiaries for your assets and accounts. As you make these selections, you'll need to determine whether each beneficiary should be revocable or irrevocable. This choice can have significant implications for your estate plan and financial legacy. Consult a financial advisor when you are considering beneficiary choices to help you make the right choice for your unique situation.
A beneficiary is a person or entity you designate to receive the proceeds from a specific account or policy upon your death. Common accounts with beneficiary designations include:
Life insurance policies
Bank and investment accounts
You can name multiple beneficiaries for each account or policy and assign percentages of proceeds to each one. Beneficiaries are often relatives, such as children and spouses. However, beneficiaries don't need to be relatives. You can designate friends, organizations, your estate or trusts to be beneficiaries of your estate.
Revocable and Irrevocable Beneficiaries
When you choose beneficiaries, you'll need to classify each one as revocable or irrevocable. Key differences between these beneficiary types include:
Can be changed anytime without the beneficiary’s consent or knowledge
Gives the account owner full control over the assets
Provides flexibility to change beneficiaries as circumstances evolve
Cannot be changed without the beneficiary's written consent
Gives the beneficiary certain legal rights to the assets
Should be seen as a permanent designation
In most cases, revocable beneficiaries provide more flexibility, while irrevocable beneficiaries offer more permanence. Certain obligations like court orders or prenuptial agreements may dictate the use of irrevocable beneficiaries. For instance, a divorce decree may identify children from a marriage as irrevocable beneficiaries of an estate to ensure fulfillment of child support or similar obligations.
Beneficiaries in Estate Planning
Effective estate planning requires carefully selecting beneficiaries and coordinating them across your accounts. Important estate planning roles beneficiaries play include these:
Direct assets to intended heirs
Avoid the costs and delay of going through probate
Provide for loved ones after your death
Support favorite charities and causes
Help minimize estate taxes
Facilitate wealth transfers across multiple generations
Designating beneficiaries can exhibit more complexity than simply naming one person to get each account. For example, you may name your spouse as the primary beneficiary on your retirement accounts and life insurance to provide for his or her living expenses after your death. Meanwhile, you could designate your children as secondary beneficiaries who will inherit those assets upon your spouse’s death. You might also designate part of one account to go to a nonprofit charity, while the rest goes to support a second cause.
Revocable Beneficiaries in Estate Planning
Given their flexibility, revocable beneficiaries tend to play a larger role than irrevocable beneficiaries in most estate plans. Here are some popular ways to use revocable beneficiaries:
Update beneficiaries as life circumstances change. For example, you may want to add grandchildren born after you originally completed your estate plan.
Coordinate beneficiaries across accounts. You can align beneficiaries on various accounts to support your overall goals.
Revoke beneficiaries if relationships deteriorate. For instance, if a falling out occurs with a named beneficiary, you can revoke their status.
Prevent beneficiaries from blocking changes. Unlike irrevocable beneficiaries, revocable ones cannot stop updates by refusing to consent.
Adapt to major life events like marriages, divorces, remarriages, etc. Updating revocable beneficiaries allows you to modify your plan.
Maintain flexibility across multiple phases of life. Young professionals may name different beneficiaries than retirees.
Despite the advantages, revocable beneficiaries do come with some limitations. The major one is that account owners must take action to update them in writing on account or policy documents when circumstances change.
Delaying or failing to modify beneficiaries after the situation alters may generate significant negative consequences. On common example occurs after a divorce. If you fail to revoke your ex's status as a beneficiary, your former partner could still inherit your assets.
Also, while the concept of revocable beneficiary rests on the idea that an account owner can change beneficiaries at will, this is not ironclad. Someone whose status as beneficiary got revoked could mount a successful court challenge that the change lacked validity due to a variety of circumstances, such as the account owner was not of sound mind when making the change.
Finally, if you are named as a revocable beneficiary, avoid assuming you will benefit when the estate is settled. An account owner can change a revocable beneficiary designation without notifying the erstwhile beneficiary. This can lead to surprises when an estate is settled.
Many estate plans feature revocable beneficiaries because they provide flexibility to adapt the plan over time as circumstances evolve. Marriages, divorces, births, deaths and other life events may suggest the need to change the beneficiaries in an estate plan. Revocable beneficiaries can be changed at any time, for any reason, with or without permission of the beneficiaries. However, you need to remain vigilant in updating them when circumstances dictate.
Tips for Estate Planning
A financial advisor can identify revocable and irrevocable beneficiary approaches that align with your overall goals. Finding a financial advisor doesn’t have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset's How Much Life Insurance Do I Need? tool to design coverage that will give you the coverage required to fulfill your financial objectives.
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