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What are beneficiary designations?

When estate planning, you'll need to decide what to do with proceeds from retirement accounts and life insurance policies. In this case, beneficiary designations determine who receives these assets after you die. It's important to understand how beneficiary designations actually work to ensure your estate will be dispersed in the correct manner after you're gone. That's why The Balance offers the following information. 

When you open a retirement account or purchase a life insurance policy, you'll be asked to designate a beneficiary. At this point, you'll fill in a person's name and how much of the asset they will receive upon your death. You can also name backup heirs in the event the first choice is also deceased at the time of your death. It's important to review this information on a regular basis, especially if it's been a while since your first set up the account. 

The upside of beneficiary designations is that they bypass probate. This is the often costly process of proving a will's validity in court, which can take quite some time. Conversely, these assets will pass directly to the heirs you specify on the appropriate documents. The potential downside is that beneficiary designations override information contained on your will. In the event there is a conflict found, the information contained within the will takes a back seat to account documentation. 

Finally, you also want to keep tax costs in mind when specifying heirs. Taxes aren't an issue when assets are passed from spouse to spouse, but they can be a concern when passing them along to other heirs. In this case, make sure the person is aware of your intentions so he or she can take tax planning steps of their own. You can also consider passing assets along to a charity, which relieves the tax burden. 

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