As you get ready to create an estate plan, you may have thought that the easiest place to begin would be naming beneficiaries to certain accounts. Certainly, ensuring your beneficiaries are in order is vital, and it is relatively simple to appoint the desired parties to these roles. Commonly, accounts that allow for such designations have forms that you can easily fill out.
Before you start the designation process, however, you may want to keep in mind that there are different types of beneficiaries. In particular, you may need to decide whether you want to appoint an irrevocable beneficiary or revocable beneficiary to a certain account, such as an insurance policy.
What is the difference?
It is crucial to know the difference between an irrevocable and revocable beneficiary. Just like with trusts, irrevocable means that one cannot change the terms. As a result, if you name an irrevocable beneficiary to a life insurance policy or another account, you cannot change that beneficiary on a whim. Instead, you would need the permission of the named beneficiary and essentially have him or her give up the rights to the assets.
If you choose to go the revocable route, you can change your beneficiary designation as you see fit. You would not need the already named beneficiary’s permission and would not risk having the beneficiary deny you the ability to change your mind.
Is one better than the other?
Neither of these options is necessarily better than the other in general, but the one that best suits the circumstances depends on your specific needs and wishes. For example, you may have children from a previous marriage whom you want to receive the payout from your life insurance policy and do not want to risk your new spouse changing the terms. As a result, naming your children as irrevocable beneficiaries could be wise.
On the other hand, naming your spouse as an irrevocable beneficiary may not be wise just in case the two of your divorce. If this happens, you will need your now ex-spouse’s permission to change the beneficiary designation, and if the marriage ends badly, your ex may not want to give up his or her rights to the money.
Considering your options
As with any estate planning decision, it is important that you look at the situation from your personal perspective and determine the effect you want your decisions to have on your loved ones. Naming beneficiaries is certainly a critical step to take when starting your estate planning journey, but it is crucial that you fully understand the weight of your decisions.