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Updating beneficiaries is a crucial part of estate planning

When California residents decide to develop an estate plan, it is important that they understand the difference between bequests and beneficiary designations. After a will holder passes away, their assets will generally be distributed according to their wishes following the probate process. Clauses in a will that state how assets will be distributed to heirs are called bequests. However, assets like retirement accounts that have beneficiary designations are handled differently.

The individuals who receive the funds from life insurance policies or retirement accounts after the account holder passes away are known as designated beneficiaries. Ensuring that these designations stay properly updated is a crucial step in the estate planning process that is frequently overlooked.

Failing to update the designated beneficiaries listed on financial accounts can lead to unintended tax consequences for heirs. When a beneficiary dies before the account holder, the funds contained in the account will usually pass to the estate for distribution. Retirement accounts like IRAs are attractive largely because of the tax benefits they provide. However, heirs can be left with hefty tax bills if these funds are distributed early.

One of the chief benefits of a carefully crafted estate plan is peace of mind. While attorneys with estate planning experience may recommend that beneficiary designations be checked, they could also suggest that assets be placed in trusts. Trusts not only provide testators with greater control over when and how their assets will be distributed, but they also allow estates to avoid the lengthy and public probate process.

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