Updating beneficiary designations is a part of good estate planning

An estate plan addresses the question of how-and to whom-you want your assets distributed after your death. Nerdwallet has observed that far too many people tend to overlook estate planning given that it can seem daunting and confusing. Moreover, for many of us, estate planning can be a "depressing thing to think about." However, estate planning basics are relatively easy to understand and having a plan in place for what will happen to your assets after you pass "will ease the pain of your passing for your loved ones" and prevent a situation where you die intestate.

The Vanguard Investment Group's website notes that understanding how your assets will be transferred after your death enables you to create an estate plan that is in accord with your intentions. Most people tend to think that having a will executed is the be-all and end-all of estate planning. In reality, a will is often only one document which makes up an estate plan. Not all of your assets will pass according to the provisions of your will. For example, annuity contracts, life insurance policy proceeds and funds contained in 401(k)s and IRAs will pass according to the beneficiary designations and not according to your will.

Unfortunately, as reported by the Wall Street Journal, the majority of Americans simply do not understand that beneficiary designations will override the terms and provisions of a will.

Most people designate a beneficiary when, for example, their 401(k) or IRA account is set up. Years later, they do not remember who they may have selected as their beneficiary. Large amounts of assets will pass under these "substitute wills." According to the Journal, there are trillions of dollars contained in IRA and 401(k) accounts.

The danger posed by never bothering to change out-of-date beneficiary designations is that your estate planning goals could be upended. Suppose for example that you designated your spouse as a beneficiary on a life insurance policy. Subsequently, you divorced but later remarried and thereafter had two children. However, you never bothered to update the beneficiary designation on the life insurance policy. Contrary to your desire, the life insurance proceeds will end up passing to your ex-spouse rather than your current spouse and two children.

Updating tips

Beneficiary designations need to be updated regularly. The Marketwatch website specifically advises that you should check to see if you need to update your beneficiary designations at least once a year. However, the advice that beneficiary designations should be reviewed once every year is subject to the following caveat: If you have experienced a life-changing event such as a marriage, a divorce, or the birth or death of a loved one, you may need to make changes immediately. Another good opportunity to review beneficiary designations is when you roll over a 401(k) or complete a Roth IRA conversion.

Seeking legal help

Making sure that your beneficiary designations on retirement accounts and insurance policies are in sync with your will is part and parcel of good estate planning. If you have never updated your will or beneficiary designations, you should contact a Michigan attorney experienced in handling estate planning matters. An attorney can assist you in reviewing your estate plan and updating it in order to properly reflect your current intentions.