Millions of Americans are expected to receive larger-than-usual tax refunds this year, a fact that makes it especially important to double-check who you’ve named as your beneficiaries.
Imagine that like many couples, you named your spouse as your beneficiary on your accounts, but you’ve recently divorced. Say your tax refund then hits your bank account, and shortly thereafter, you unexpectedly die. Unless you’ve changed your beneficiary (typically called Payable on Death — POD — when attached to a bank account or CD), it’s your ex-spouse who’s going to walk away with the money.
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Unless that’s what you intend, now is the time of year to take a fresh look at all of your important accounts and ensure you’ve named the beneficiaries and contingent beneficiaries you truly want the money to go to.
Why tax season is the ideal time
Estate planning was never intended to be a “set it and forget it” process. As your life evolves, so should your plan — including your beneficiaries. Here’s why it pays to tie beneficiary updates with the annual April tax deadline:
- Tying beneficiary updates to April 15th is an easy way to remember to take care of the task at least once a year. Think of it as an annual reminder.
- If a CPA helps with your taxes each year, that person can also help you identify ways to minimize your taxes while you’re alive and minimize how much your beneficiaries will pay in taxes after you’re gone.
- Dealing with taxes and beneficiary assignments around the same time is a good way to review how much money you’re earning, how much you have invested and saved, and how much you want to go to each of your beneficiaries.
- While estate planning may not be at the top of your “to-do” list during tax season, it provides a natural opportunity to ensure your plan continues to reflect your family’s needs, current tax conditions, and your personal goals.
- Chances are, your important financial documents are already gathered as April 15 approaches, making it the perfect time to thumb through them to ensure your beneficiaries are up to date.
As you’re gathering tax-related documents, it won’t take much effort to pull out all other financially related documents, such as life insurance policies, 401(k)s and IRAs, bank accounts, health savings accounts (HSAs), real estate deeds, annuities, and trusts.
Tip: If you plan to check beneficiaries each year during tax season, make it a point to keep all financial documents in one easy-to-locate place.
Named account beneficiaries typically come out on top
Even if you have a solid will in place, beneficiary designations on specific accounts typically override any instructions in your will. So, if you name your child as the sole beneficiary of your estate but name your significant other as the beneficiary of your life insurance, your life insurance money will go to to your significant other.
Combing through your accounts to update your beneficiaries at least once a year is the best way to ensure the people (and causes) you care about will be taken care of when you’re gone. Tying the task to April 15th makes it easier to gather all the documents you need to get both jobs taken care of.