Why naming and updating beneficiaries is essential

  • Robert Wootton

    Robert Wootton

By Robert J. Wootton
Capstone Financial Advisors
Posted7/24/2022 1:00 AM

When was the last time you checked the beneficiaries on your 401(k), IRA and life insurance policies? If you can't remember, you're not alone.

It's a question I ask every new client. We frequently discover they've either neglected to list beneficiaries or they haven't updated them in a while. Beneficiary designation is one financial aspect we don't want to neglect.


A beneficiary is the entity who receives your funds upon your passing. While often thought about as a person, trusts can also be named beneficiary. When naming a person, most people consider whether or not they want them to inherit their funds. Spouses and children are the obvious choices.

But there are other considerations such as the beneficiary's age, tax bracket and level of fiscal responsibility. Inheriting money will impact their tax liability.

For instance, new laws require non-spousal beneficiaries to take IRA distributions in 10 years. If your child is forced to take distributions at the highest tax bracket, what's meant to be something positive becomes a negative.

Updating your beneficiaries is important for all the same reasons. Families change and grow. Ensuring additional children are taken care of appropriate to their age, tax status and responsibility is done through these updates. When single people designate their parents as beneficiaries, they'll want to ensure they update the beneficiaries once they've gotten married or had children of their own. When people divorce and remarry, they'll most likely want to adjust spouses, children and/or grandchildren.

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There are risks when naming a person as a beneficiary: giving someone money outright opens them up to issues such as lack of creditor protection, divorce settlements and incapacity planning. If your beneficiary has special needs and receives state-funded services, you won't want to increase their income to a level that makes them ineligible to receive the services they need. Naming a trust your beneficiary is another -- and perhaps better -- option.

Trusts provide a great framework for your family dynamic and situation:

• A trust can be utilized to restrict distributions and stipulate how the money is spent.

• When your beneficiary is a minor and cannot legally own an account without a custodian, a trust appoints a trustee in their stead until the beneficiary is a certain age.

• Trusts can also be used to remove ownership from special needs individuals, so they have access to those government benefits I mentioned above.


• In the case of multiple marriages, naming a trust as beneficiary enables you to pass on assets to benefit a second spouse and your children (and not a second spouse's children). A trust can also ensure your children receive funds but not your children's spouses, especially if your children have a future divorce.

• For individuals who would be required to take disbursements, their trusts can be structured to help ensure distributions are paid at lower tax rates while maintaining some degree of control for a period of time until the IRA assets are distributed.

In addition to primary beneficiaries, you'll want to name contingents (people who receive the funds in the event the beneficiary passes away or is otherwise unable to receive the funds). When naming contingents, all the same considerations apply.

As you can see, there's a lot that goes into naming beneficiaries for your 401(k), IRA and life insurance policies, especially if you're a high-net-worth individual. In the event you don't name beneficiaries, you risk putting your estate into probate. Everything you earned in your lifetime becomes subject to your state courts.

I don't want to see that happen. As part of my process, when I update clients on their accounts, projections, and net-worth updates, we also review beneficiaries. We talk about your family situation and the legacy you'd like to leave behind. You've earned it.

• Robert J. Wootton, MBA, CFP, is a senior wealth adviser and partner at Capstone Financial Advisors. With over 30 years of experience in financial services, he enjoys maintaining a deep knowledge base and sharing this expertise to help his clients reach their financial goals. Wootton is a certified financial planner certificant. He earned his Bachelor of Science in Finance and an MBA in Finance and Accounting from DePaul University.

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