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  • Eric Walter, CFP®

Financial Planning Corner: You Have a Primary Beneficiary, Is That Enough?

For many, the decision on a primary beneficiary is straightforward. It is a person with whom you share a close bond, be it a spouse, partner, sibling, or anyone else with whom you may have a very strong personal and/or financial relationship. Often, their continued financial support is intertwined or dependent on your relationship. Where it may become complicated is who to name next, your contingent beneficiaries.

Having contingent beneficiaries is especially important for a relationship where you and your primary beneficiary are often exposed to simultaneous risks, such as traveling together. Any assets with no living primary beneficiary and no designated contingent beneficiaries will go through probate, a court-supervised process to distribute estates. Probate can be expensive, time-consuming, and may not align with your wishes. By choosing a contingent beneficiary, or beneficiaries, you ensure your wishes are followed while also avoiding unnecessary delays and costs for those who are receiving your legacy and managing your estate. This is applicable not only for your investment accounts but other assets such as bank accounts, CDs, and life insurance.

The type of distribution is also an important component in controlling how assets will be distributed down family lines. This would come into play if your designated beneficiaries, who have children, were no longer living and there has been no beneficiary update. There are two distribution methods- Per Stirpes (Latin for “by the roots”) and Per Capita (Latin for “by the head”). A Per Stirpes distribution means that if your beneficiaries predecease you, their portion of assets pass in equal shares to their living children, if any. In this case, each branch of the family receives the equivalent share designated, regardless of how many children are included. A Per Capita distribution means that if your beneficiaries predecease you, those assets are distributed in equal percentages to all living children. As you can see in the examples below, this could potentially make a substantial difference in what each beneficiary ultimately receives.

While designating beneficiaries today is extremely important, it is just as important to keep up-to-date as life changes to ensure continued alignment with your wishes. We recommend reviewing annually or whenever major life events occur, such as death, divorce, birth of children or grandchildren, and new marriages. Let us know if you would like to schedule a time to discuss or make any changes to your current beneficiary designations.

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