When a person dies, with few exceptions most of his or her assets pass on to heirs through a will. In the absence of a will, state law specifies the portions that certain relatives inherit. One exception to this general rule is jointly-owned property. Another exception is the group of instruments that allow beneficiary designations, that is, life insurance, annuities, pensions, and Individual Retirement Accounts.

The beneficiary is the person, group, or other entity designated by the owner to receive the death benefit. The beneficiary has no rights in the policy until the death benefit is payable. The owner can change the beneficiary at any time and as often as desired. This group of assets usually comprises the largest set of assets owned by the decedent. And naming a beneficiary is often done without much forethought. Sometimes this can be a mistake, especially when this action is not coordinated with the estate planning for other assets.

Here are a few of the many points to ponder.

In family situations the primary beneficiary is usually one person, often the spouse of the insured. That is a simple choice, incurs no expense, and is the easiest way to get the death benefit into the hands of that person after the insured dies.

But there can be problems with that. What if the beneficiary is so distraught or otherwise not at peace that dealing with a large inflow of cash could overwhelm and lead to costly errors? What if that person is not good at handling money, especially large amounts? And grieving spouses can easily be identified by con artists who often find a way to get the cash.

If the beneficiary is underage or otherwise legally incompetent, a guardian will have to be appointed to oversee the funds, a rigid and costly process.

How about just having the money paid to the estate of the decedent? That way it will follow whatever decisions are made for the rest of the assets that will pass by will. This could help in the estate settlement, providing needed cash to pay taxes, debts, and administration expenses.

Among the shortcomings of this strategy: The proceeds will be subject to probate and administrative expenses that would otherwise have been avoided, Plus, the assets that pass by will are subject to public scrutiny – everybody can read your will. And the proceeds will be available to the claims of the creditors of the decedent. All this is avoided by naming a beneficiary other than the estate.

Some people are confused about income taxes levied on death benefits of annuities and life insurance when each is purchased with after-tax dollars. As for annuities, the portion of the death benefit that represents the after-tax dollars paid into the annuity (the cost basis) is received by the beneficiary tax-free. The balance of the death benefit, representing tax-deferred gain in the contract, is ordinarily taxed to the beneficiary as ordinary income. But in most settings, life insurance proceeds are all received by the beneficiary tax-free, including all the untaxed growth that the cash value has amassed over the years.