Naming beneficiaries on retirement accounts and life insurance policies is a simple step with powerful estate planning benefits. It allows these assets to pass directly to your chosen heirs without the need for probate. Why does it matter? It can help to save time, money, and stress. Within this article, our Indiana estate planning attorney explains the benefits of making sure that your beneficiaries are named in your retirement accounts and your life insurance plan.
Retirement Accounts and Life Insurance are Key Assets
When planning your estate, it is easy to focus on your home, bank accounts, or investments, but don’t overlook the importance of retirement accounts and life insurance policies. These are actually often among the largest and most accessible assets a person owns. One key reason is that they pass directly to named beneficiaries. That means that they can offer liquidity and stability to your loved ones at a critical time. Retirement accounts (IRAs, ROTH IRAs, 401(k)s, etc) are key assets for many people and families. The same is true for life insurance. Indeed, the Insurance Information Institute (III) reports that approximately half of Americans are covered by at least one life insurance policy.
Avoiding Probate: A Direct Transfer of Assets (Smart Estate Planning)
One of the most notable benefits of naming beneficiaries for retirement accounts and life insurance policies is the ability to avoid probate. Probate is the court-supervised process through which a person’s estate is finalized. Assets with designated beneficiaries pass directly to the named person. In other words, they do not have to go through formal probate in Indiana. That can be a major advantage because probate has the potential to be a time-consuming process. A direct transfer of assets is smart estate planning. It helps to ensure faster access to funds for loved ones who may need immediate support after your death. By keeping these accounts outside the probate estate, you both preserve privacy and reduce the administrative burden.
Retirement Accounts Offer Certain Tax Advantages as an Asset
Another reason that properly using retirement accounts is smart estate planning in Indiana is the potential for favorable tax treatment. Indeed, naming the right beneficiary can help reduce the tax impact of inherited assets. For example, spouses who inherit retirement accounts can often roll the funds into their own IRA. In other words, they can preserve the tax advantages and defer distributions. While non-spouse beneficiaries may be subject to the 10-year rule under the SECURE Act, that is still a decade of favorable tax treatment.
Note: Life insurance proceeds are generally income-tax-free to beneficiaries. That also makes them a valuable estate planning tool in their own right.
Beneficiary Designations Ensure Your Wishes Will Be Carried Out
A core advantage of beneficiary designations for retirement accounts and life insurance is that they can ensure that your wishes for your assets are actually carried out. Naming beneficiaries on your retirement accounts and life insurance policies gives you control over who receives those assets after you pass away. These designations take precedence over your will. Remember, that means that the funds go directly to the person you have chosen. There is no court involvement required when you have valid beneficiary designations in place. However, if you leave the section blank or rely solely on your will, your wishes may not be honored as intended. Clear, up-to-date beneficiary forms ensure that your assets are distributed quickly, privately, and according to your plan.
The Importance of Naming Beneficiaries of Retirement Accounts and Life Insurance
Retirement accounts (like IRAs and 401(k)s) and life insurance policies are governed by contracts, not your will. In other words, this means these assets pass outside of your estate. However, that is only if you have named a beneficiary. If you do not, the funds may go to your estate by default. Your “estate” as a non-personal entity is the default beneficiary if no other beneficiary is named. That means that assets would be forced to go through probate. There can be major delays and, potentially, even disputes. Naming a beneficiary ensures the money transfers directly to the person you choose. Better yet, that transfer is quick, private, and according to your wishes.
The Bottom Line: Without a valid designation, your loved ones may face confusion, legal costs, or unintended outcomes.
You Need to Be Sure Your Beneficiary Designations are Up-to-Date
Outdated beneficiary designations can lead to serious consequences. That is true even if your will says otherwise. Life changes like marriage, divorce, the birth of a child, or the death of a loved one can all impact who you want to receive your assets. But your retirement accounts and life insurance policies will follow the last beneficiary form on file, not your current intentions. As an example, if you forget to update these forms, your assets could go to an ex-spouse or someone else you no longer intend to benefit. Reviewing your designations regularly helps ensure your estate plan stays accurate and effective. An Indiana estate planning lawyer can review your overall estate plan.
How Our Indiana Estate Planning Attorney Can Help
Proactive estate planning is a must. It is best to take a proactive approach. At White & Jocham, we have the knowledge, skills, and professional experience that people and families in the Indianapolis area can rely on. Whether you have questions about retirement accounts, life insurance policies, or any other estate planning matter, our team is here as a resource. You can set up a strictly confidential, no-obligation initial consultation with our Indiana estate planning attorney.
Contact an Indiana Attorney for Elder Law and Estate Planning Today
At White & Jocham, we are committed to providing you with top-tier elder law and estate planning services. If you have any questions or concerns about naming beneficiaries for your retirement accounts and/or a life insurance policy, we can help. Contact us today for a fully confidential, no-obligation initial consultation. With an office in Greenfield, we provide elder law and estate planning representation in Indianapolis and throughout Indiana.
