Assigning Beneficiaries to the Right Financial Vehicles

October 23, 2023

Jamie Schloegel, Chief Executive OfficerBy Jamie Schloegel, Chief Executive Officer

Ensure your legacy by assigning beneficiaries with care

When it comes to preserving your legacy, the details matter … a lot. The choices you make now will influence your heirs’ financial well-being for years to come. In my role at the La Crosse Community Foundation, I frequently encounter situations where people are unaware of the nuances involved in estate planning, particularly when naming beneficiaries. Here are some of the most crucial considerations.

The all-too-common misstep: inconsistent beneficiary assignments

One of the most common mistakes many people make is misaligning beneficiaries in wills versus financial vehicles, such as insurance policies, retirement accounts, and investment portfolios. Most people don’t realize that the person named as the beneficiary on the financial policy supersedes the one named in your will or trust.

This means if you name your spouse as the beneficiary in your will but list your child as the beneficiary on your retirement account, the latter will take precedence. Your child will inherit the retirement account despite what your will states. This has led to unfortunate disputes and unintended disinheritances, causing emotional and financial distress for families during an already challenging time.

Important factors when assigning beneficiaries

When designating heirs, consider the asset’s nature and the beneficiary’s financial position. Here are some factors to keep in mind:

  • Type of asset — Different assets have different tax implications. Retirement accounts like 401(k)s and IRAs, for example, have tax-deferred growth, so your beneficiary may inherit a tax burden along with the asset.
  • Financial aptitude — Assess how well-suited the potential heir is to manage the assets. Those inexperienced with finance may not be the best choice for complex accounts.
  • Needs and plans — Is the beneficiary planning a large purchase like a house? Are they nearing retirement, or are they a minor? Tailoring the asset to the beneficiary’s life stage can make a significant difference.
  • Spousal rights — Remember that Wisconsin is a community property state, which means that any assets acquired during the marriage are generally considered to be owned equally by both spouses.
  • Charitable contributions — To leave a legacy, naming a charitable organization like La Crosse Community Foundation as the beneficiary of tax-deferred accounts can be particularly effective. Not only are these contributions tax-exempt, but they can also bypass the lengthy probate process.

Match the right types of heirs to the right types of assets

Some types of accounts and policies lend themselves better to some uses than others. While everyone’s circumstances are unique, beneficiaries are often named as follows.

  • Retirement accounts — Tax-deferred accounts like IRAs and 401ks can be ideal vehicles for charitable contributions. That’s because when given to charity, as referenced above, proceeds aren’t taxed; plus, the funds can bypass probate.
  • Life insurance policies — Ideal for dependents and spouses who may require immediate financial support upon your demise.
  • Investment accounts — Useful for heirs like adult children who can make the most of these assets over a more extended period.
  • Real estate and tangible assets — Consider leaving these to beneficiaries who have a personal connection or can use the property practically.
Consult your professional advisors

Estate planning is a nuanced process, and individual circumstances can vary greatly. For this reason, it’s crucial to consult financial advisors and legal professionals to ensure that your legacy unfolds precisely as you envision. And if you have questions about giving options at La Crosse Community Foundation, please contact us.