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Retirement account designation: Heirs versus beneficiaries

We often lump the words heirs and beneficiaries together for purposes of blog posts, but in some context they are very different things. It's important to understand the difference between these two words, especially when you are dealing with something such as an investment or retirement account.

An heir is someone who is inheriting all or part of your estate. These are the individuals who will receive your assets after you pass away as those assets are handled via the probate process. Sometimes, beneficiaries are also heirs in that they might receive assets upon your death.

Beneficiaries are also individuals that you add as such on retirement and investment accounts. These accounts usually require you to name a beneficiary, and if you do so, then the account typically automatically passes to that person upon your death. In many cases, an account with this type of beneficiary designation does not have to be probated.

Ensuring that your beneficiary designations are correct and up-to-date is important. If you have beneficiary designations on accounts that are in contrast to the information you place in your will, you create probate struggles for your heirs. If you have no beneficiary designations, it could take longer for heirs to obtain access to such accounts.

Another reason to ensure your beneficiary designations are correct is that you might need someone else to obtain access to your accounts while you are still alive. This is especially true for retirement funds. If you are incapacitated, then you might want to ensure your beneficiaries have early access to such funds. If you want to ensure your accounts are protected if you can no longer manage them, then consider naming someone as your financial power of attorney.

Understanding the difference between beneficiaries and heirs is only one step in planning for your estate. Working with an estate lawyer lets you learn more about the process and make comprehensive decisions that protect you, your assets and your heirs and beneficiaries.

Source: FindLaw, "Personal Retirement Accounts and Your Family," accessed July 15, 2016

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