Estate planning is an essential part of every person’s overall financial planning. When you pass away, you want to ensure that your assets are distributed according to your wishes. However, many people are unaware of how some of the most basic estate planning tools function. Two common methods of distributing assets are beneficiary designations and wills. In this article, we’ll explore beneficiary designation vs. will differences to help you understand how to use each in your personal estate plan.
Beneficiary Designation vs. Will: What is a Beneficiary Designation?
A beneficiary designation is a legal document that specifies who will receive your assets upon your death. It is most commonly used for assets such as life insurance policies, retirement accounts, and annuities. When you open one of these accounts, you will be asked to designate a beneficiary. You can name one or more beneficiaries, and you can specify the percentage of the account that each beneficiary will receive. The beneficiaries you name can be changed as your life circumstances change. In fact, it’s a good idea to review your beneficiaries annually to be sure you don’t need to make changes.
One of the main benefits of a beneficiary designation is that it bypasses probate. Probate is the legal process of distributing assets after someone dies. It can be a lengthy and expensive process, and it is not always necessary. By designating beneficiaries, you can avoid probate altogether, which can save your beneficiaries time and money – as well as emotional stress during an already challenging period of grief.
SEE ALSO: Finance Tips for First Generation Wealth Builders
Beneficiary Designation vs. Will: What is a Will?
A will is a legal document that outlines how your assets will be distributed after you die. It allows you to name an executor, who will be responsible for carrying out your wishes. In your will, you can specify who will receive your assets, and you can also name guardians for any minor children you have.
One of the main benefits of a will is that it allows you to be very specific about your wishes. You can detail exactly who should receive each of your assets, and you can also include any special instructions or conditions. A will can also be updated at any time, which allows you to make changes if your circumstances change. Try not to think of your will as a “one and done” process. Rather, it should be a document that evolves with you as your life changes.
Beneficiary Designation vs. Wills: Things to Remember
Many people use both of these common methods to distribute assets after they pass, so try not to think of estate planning as a beneficiary designation vs. will decision. The best choice for distributing each type of your assets will depend on your individual circumstances.
Here are a few factors to consider:
Probate: If you have assets that are likely to go through probate, a will may be the better choice. Probate can be a lengthy and expensive process, and a will can help simplify things for your beneficiaries.
Specificity: If you have specific wishes for how your assets should be distributed, a will may be the better choice. A will allows you to be very detailed and specific about your wishes.
Speed: If you want your beneficiaries to receive their assets quickly and without any hassle, a beneficiary designation may be the better choice. By designating beneficiaries, you can bypass probate and ensure that your assets are distributed quickly and efficiently.
Flexibility: If you anticipate that your circumstances may change in the future, a will may be the better choice. A will can be updated at any time, which allows you to make changes if your situation changes.
Again, many people have both beneficiary designations and a will. This ensures that all of your assets are covered and that your wishes are clear.
SEE ALSO: Multi-Generational Wealth Planning: Tips to Prepare Your Heirs for an Inheritance
Beneficiary Designation vs. Will: Don’t Make This Mistake
There’s one very important point to remember as you’re estate planning, and it’s that your will won’t override your beneficiary designations. So, you should not address one specific asset, such as a 401(k), in both ways. If you have your ex-spouse listed as your designated beneficiary, but then you update your will to state that your children should inherit the account, the law says – in almost all cases – that the beneficiary designation will stand.
Estate planning is an important part of financial planning, and you can use multiple tools to accomplish your wishes. It’s a good idea to consult with an estate planning attorney to help you make the right decision for your situation. With careful planning, you can ensure that your assets are distributed according to your wishes and that your loved ones are taken care of when you’re gone.