5 Mistakes to Avoid in Beneficiary Designations

cash flow CFP
By K. Bridget Schneider, CFP®, CRPC®

beneficiary designations

Do you know that your Will may not control who inherits all your assets when you die?  Some assets may pass by beneficiary designation.  By providing instruction to the financial institution that holds your account, you name who will inherit the assets in that account upon your death.  This includes life insurance, annuities and retirement accounts.  In addition, many financial companies allow you to name beneficiaries on non-retirement accounts.  These are known as TOD (transfer on death) or POD (payable on death) accounts.

Naming a beneficiary can be an easy way to ensure your loved ones will receive their inheritance directly without waiting until the rest of your estate has settled.  But beneficiary designations can also be problematic so you should make sure they are correct since mistakes can be costly.  Here are five critical mistakes to avoid when dealing with your beneficiary designations.

Failing to Name a Beneficiary

Some people fail to name a beneficiary for retirement accounts or life insurance.  Instead these assets pass to the deceased’s estate to be distributed per the instructions in their Will or the intestacy laws of their state.  Unfortunately, it can take time before any recipients have access to the assets.

In the case of tax deferred accounts like IRAs, this may have unnecessary income tax consequences as well.  When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death.  This causes any income tax to be paid earlier than may have been necessary and removes the possibility of continued tax deferred growth.

In addition to naming a primary beneficiary, it’s also a good idea to name a contingent or secondary beneficiary as well.  This helps ensure that the asset goes to the individual or organization intended, even if the primary beneficiary has passed away or they choose to disclaim the asset.

Naming the Wrong Beneficiary

Some individuals fill out their beneficiary designation forms incorrectly.  For example, there may be multiple people in a family with similar names (such as Sr. and Jr.), but the beneficiary designation form may not specify.  Or your beneficiary may change their name through marriage or divorce.  Sometimes assumptions are made about a beneficiary’s legal name that are incorrect.  Names that don’t match exactly can cause delays in payouts, and in a case of two people with similar names, could result in litigation.

Another mistake occurs when one beneficiary is named, but the intention is for the inherited asset to be distributed to others.  If you intend to leave an asset to multiple beneficiaries, you should indicate each of them and their percentage share.  That is the only way to be certain that the asset will be distributed per your wishes.

Not Updating Your Beneficiaries

Naming a beneficiary is part of an overall estate plan.  But just as life changes, your estate plan may need to change as well.  The beneficiaries you name today may not be the same as those you would choose in ten years.  I suggest reviewing your beneficiary designations on an annual basis.  This helps to be sure names are correctly listed and the assets will pass to the individuals or entities you desire.

Not Considering Special Circumstances

It’s possible that some beneficiaries shouldn’t receive an asset directly.  Children, for example, are not able to claim due to being under legal age.  A court-appointed person will have to claim and manage the money until the minor turns 18.  This can be costly and require annual accountings to the court.  Individuals with special needs can lose valuable government benefits when they receive assets directly.  This happens when the inherited asset causes them to own too many assets to continue to qualify.  And those with financial issues or creditor problems can lose the asset through mismanagement or debts.

In these circumstances, it’s important to review your options with a legal professional.  One option may be to create a Trust to be named as the beneficiary. The Trustee can claim the asset and manage it for your intended recipients for a time period that fits the situation.

Not Reviewing Your Designations with Legal and Financial Advisors

Failing to coordinate your designated beneficiaries with your estate plan may result in unwanted tax consequences, failure to leave the estate to those you intended (e.g. children don’t get an even share), or worse, accidentally leaving out a family member from an inheritance.  Remember, beneficiary designations are designed to ensure you have the ultimate say over who will get your assets when you are gone.  So, take the time to discuss your intentions with legal and financial professionals.  They will be aware of legislative changes or tax considerations to help you control where your money goes and that is what estate planning is all about.

If you would like help with estate planning or have financial planning questions that need answers, then be sure to visit our website today or call us at 217-605-8130.  We want to help you make more informed financial decisions.  As your friendly financial guide and ally, we can help you create a budget, develop a financial plan, review your investment strategy, or structure an estate plan that makes sense for your unique situation.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. 

CRPC® designation conferred by the College for Financial Planning.


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