Your estate plan can be helped or hurt by the choices you make in your beneficiary designations. Life insurance and retirement accounts are the most common assets that allow beneficiary designations (and thereby avoid probate, an expensive and drawn out court process). Avoid these costly mistakes to make sure your beneficiary designations don’t undermine your estate plan.
Naming Your Estate As Beneficiary (or Not Naming Anyone)
The advantage of being able to name beneficiaries for your life insurance and retirement accounts is that those assets won’t have to go through probate. But if you name your estate as the beneficiary or you fail to name any beneficiaries at all, then those assets must go through probate. Why’s this a bad thing? First, the assets can become subject to the claim of your creditors or your heirs’ creditors. Second, retirement accounts will be subject to accelerated income taxes and your heirs lose the tax advantages of those accounts. And third, your estate expenses will be higher. Avoid these consequences by naming individuals or trusts as your beneficiaries.
Naming Minors as Beneficiaries
Depending on state laws, minors can only inherit very limited amounts until they turn 18 or 21. If you name a minor as a beneficiary, the court will appoint a guardian to control and invest the assets until the child reaches the appropriate age. At that time, they get to inherit all of the assets at once, which can create additional problems. All of this means increased costs and less control. If there’s a chance that you’ll have minors for heirs, then set up trusts for the minors. You’ll get to choose the trustee and can include additional terms governing the payout after they reach the age of majority. Then designate the trusts as your beneficiaries.
Misspelling Names and Other Errors
Simple mistakes can cause huge headaches later on. Make sure you get the spelling of all names correct and use the right Social Security numbers (if necessary). You don’t want your assets going to just anyone.
Assuming Your Will Overrides Your Beneficiary Designations
Beneficiary designations always trump your will (with one exception). Don’t assume all of your assets will pass according to the terms of your will. Life insurance and retirement accounts pass by beneficiary designation, and jointly owned assets (with rights of survivorship) automatically pass to the joint owner. Make sure your beneficiary designations are in accordance with your wishes.
The exception I mentioned? By law, spouses are first in line to receive retirement account assets. If you want someone else to inherit those accounts, you must have your spouse sign a written waiver or the beneficiary designation will be deemed invalid at your death.
Failing to Name Secondary Beneficiaries
If your primary beneficiary is deceased, then the assets would go to your secondary beneficiaries. If you haven’t named any, you’ll end up with the first problem I noted above (no beneficiary named – goes to your estate). Take the time to include secondary beneficiaries when naming your beneficiaries.
Failing to Update Your Beneficiary Designations
Failing to update your beneficiary designations after major life events can result in unintended distributions. For example, an ex-spouse could end up with your life insurance proceeds. There are other situations that could occur if you don’t update your beneficiary designations for marriage, divorce, loss of a spouse, loss of a child, or other major life changes.
Failing to Review Your Beneficiary Designations
By reviewing your beneficiary designations annually, you can avoid many of the mistakes mentioned above while ensuring your beneficiary designations are still in alignment with your wishes and overall estate plan. Check with your insurance and investment companies every year to find out the beneficiaries on record for your accounts and update them when necessary.
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