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The benefits of naming beneficiaries

Naming names is important so that your assets go to the right people upon your death. It's not enough, though, to put people in your will. For certain assets, such as pensions, you need to designate beneficiaries.

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To make sure your wishes are clear, here are 10 tips on naming beneficiaries:

10 tips on naming beneficiaries:

1. Understand the limits of a will.
Just because you name someone in your will, that person might not receive a designated asset if they are not also named as its beneficiary. A beneficiary trumps a will every time, according to the Financial Planning Association, a trade association for certified financial planners. The FPA gives this example: "Say you name your children in your will as heirs of your entire estate, yet an ex-spouse is still named as the beneficiary of your life insurance policy and your 401(k) plan. Your children will end up with your house and favorite golf clubs, but your ex-spouse will end up with the insurance and retirement funds."

2. Know when beneficiaries are required.
You must name beneficiaries for estate assets that will bypass probate and go directly to heirs. According to Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research in San Francisco, these types of assets include retirement accounts (both employer and individual), annuities and life and disability insurance policies.

3. Decide who gets what.
Once you have your list of assets that require beneficiaries, you face the crucial task of doling out your worldly goods. True, it's often difficult to decide which family or friend gets what. But if you fail to name a beneficiary, your state of residence will do the job for you, and that official choice might not necessarily be what you would want. Your spouse might receive everything, for instance, leaving your beloved siblings or thicker-than-blood best friend out of the inheritance. Or the state might presume that an heir named in your will should receive a particular asset that requires a beneficiary. It all depends on your state's intestate succession laws. Whatever the state decides could be challenged, but you can help prevent time-consuming inheritance battles by naming beneficiaries.

4. Don't name your estate as a beneficiary.
If you select your estate as beneficiary, your assets will end up going through probate, a costly and time-consuming process. Plus, the death benefit would count as part of your estate, meaning it could increase any estate taxes. And even though the probate process itself is lengthy, the asset actually could be distributed sooner than you would have intended. For example, it could be ordered paid as a lump sum rather than as periodic payments.

5. Don't name minor children as beneficiaries.
By law, children can't control the assets, so the court will name a guardian, either a person or a financial institution, for the assets. Instead, set up a trust or designate a guardian yourself if you want to leave your pension to your kids. Also be aware that children can take control of assets when they turn 18, something you may not want, so consider a contingency plan.

 
 
Next: Who will you name as beneficiary?
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