When it comes to retirement accounts and life insurance policies, you want to make sure the right heirs receive the proceeds. That’s why beneficiary designations are so important. As another type of estate planning tool, designating beneficiaries will ensure that your assets are dispersed in the manner you deem appropriate, as opposed to leaving the decision up to the court. TheBalance.com offers more information on how beneficiary designations can help you.

Beneficiary designations vs. wills

When you designate a beneficiary for a financial account and determine what percentage of assets the person will receive, this decision goes into effect immediately. That means that any information included within your will is overwritten. It also helps you avoid probate, which can be a costly legal process. It’s recommended that you circle back and review your designations every year or so. If you change your mind and don’t make the necessary updates you run the risk of the wrong person receiving your assets.

Setting up trusts

If you want to establish a trust for a minor or a family member with special needs using a retirement account or similar, you’ll need to take certain steps. In this case, you can choose from a revocable living trust, a testamentary trust, or a special needs trust. These trusts are funded with your assets and made available to the person named (in the event of a minor, funds will become available at age 21).

Tax considerations

While you can name a spouse without worrying about estate taxes, when providing assets to other heirs you should keep this in mind. For instance, most retirement accounts mandate that account payouts must be made in one lump sum, which makes them subject to taxes. Additionally, providing an heir a large portion of your assets may also incur a huge tax burden. In this case, it’s best to speak with an attorney on the best method for distributing assets without incurring high taxes.