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5 Key Considerations When Choosing Your Nominated Beneficiaries

When it comes to appointing a beneficiary, whether that be for a will, insurance document, pension plan or Trust, you may be quick to add a name without proper consideration and forget about it soon after. However, your choices here can have a lasting impact on your loved ones and their financial future, so it is important to consider the following key points as part of your decision-making process:

1. Consider Your Options

People often assume their beneficiaries must only be a spouse or child, but it can be anyone – from a long-term partner, a grandchild, a sibling, a relative, a close friend, or even a charitable organisation.

When considering your options on who to name, it is important to consider: their age and maturity level; their financial needs; your relationship and wider family circumstances; alignment with your overall estate plans; and your personal values.

You can have multiple beneficiaries, provided the total percentage of the proceeds equals 100%. For example, you may wish to give your spouse 50%, and 25% to two children.

2. Enlisting Reserves

Have you named reserve beneficiaries in your will? If not, and something happened to those in your will – for example, they were all involved in a fatal accident – then no one would be left to benefit. Therefore, reserve beneficiaries act as a contingency plan in the event that all the beneficiaries listed are no longer alive, whereby your estate would pass to them instead.

3. Having No Beneficiaries Listed

If you have no surviving beneficiaries listed on your will, your estate will be passed to family, depending on the legal rights relevant to your country of residence. However, this can become complicated, and your estate could pass to someone you would not wish to benefit.

“Your estate could
pass to someone you would not wish to benefit.”

Each country within the UK has different rules for working out who gets what and how much, but if there are no possible beneficiaries, your estate would ultimately pass to the Crown.

4. Changing Your Mind

Relationships, family and circumstances can change many times throughout your life, therefore it is important that any change which impacts your nominated beneficiaries is reflected and updated within these documents.

“It is important that any change which impacts your nominated beneficiaries is reflected…”

For example, if you go through a divorce or separation, or you start a new relationship then you want to make sure these documents reflect your current wishes. Otherwise, your estate could pass to your previous spouse/partner and leave your current partner – or other family members you wish to benefit instead – without.

5. Tax Implications

The nomination of beneficiaries does not necessarily exclude your death benefits from tax, so it is very important you receive the correct Inheritance Tax (IHT) planning advice to avoid this, wherever possible.

Pensions, investments, and life insurance policies can all be treated differently when your estate passes to your beneficiaries, depending on how they are positioned for IHT purposes. Therefore, when thinking about the tax efficiency of your plans it could make a big impact in choosing to nominate your children, spouse or even a close friend based on their own circumstances and various tax rules.

For example, if a life insurance policy is not set up correctly or written in Trust, this will form part of the policyholder’s estate, therefore increasing its value and thus the potential tax liability for their beneficiaries. If this creates an IHT liability for only certain beneficiaries, placing the life insurance policy in Trust for their benefit will ensure they receive these funds out with the estate, so they are not taxable.

Estate planning is a complex area involving many taxation rules and allowances, therefore it is important to seek professional advice to ensure your plans are maximised and align with your overall goals. Ensuring your wishes are carried out when you pass away and that your loved ones will be taken care of with carefully thought-out planning can offer you great peace of mind.

If you have any questions regarding your estate planning needs, updating your will or other beneficiary documentation, please do not hesitate to get in touch with a MacDonald Partnership Independent Financial Adviser on 01463 242 242. 

Author: Ross MacDonald

Published: 5th July 2024

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