Many people might not realize that their will does not control who inherits all of their assets when they die. Many assets pass by beneficiary designation — which is the ability to fill out a form with the financial company holding the asset and name who will inherit the asset upon your death.
Assets such as life insurance, annuities and retirement accounts (401(k)s, IRAs, 403bs and similar accounts) all pass by beneficiary designation. In addition, many financial companies allow you to name beneficiaries on non-retirement accounts, which are known as TOD (transfer on death) or POD (pay on death) accounts.
While naming a beneficiary can be an easy way to ensure your loved ones will receive assets directly, beneficiary designations can also cause many problems. It’s your responsibility to make sure your beneficiary designations are properly filled out and given to the financial company — and mistakes can be costly.
Here are five critical mistakes to avoid when dealing with your beneficiary designations:
1. Not naming a beneficiary at all.
Many people never name a beneficiary for retirement accounts or life insurance. The reason could be people may not realize they can name a beneficiary, or they just never get around to filling out the forms.
If you do not name a beneficiary for life insurance or retirement accounts, then the financial company has it owns rules about where the assets will go after you die. For life insurance, typically the proceeds will be paid to your probate estate. This means that your family will need to hire a lawyer, go to court and probate your estate to claim the proceeds.
For retirement benefits, if you’re married, your spouse will most likely receive the assets. But, if you’re not married, the retirement account will likely be paid to your probate estate, which has unpleasant income tax ramifications. When an estate is the beneficiary of a retirement account, all of the assets will need to be paid out of the retirement account within five years of death. This causes acceleration of the deferred income tax, which must be paid earlier than would have otherwise been necessary.
2. Failing to take into account special circumstances.
Not all loved ones should receive an asset directly. These individuals include minors, individuals with specials needs, or individuals with an inability to manage assets or with creditor issues. Because children are not legally competent, they will not be able to claim the assets. A court-appointed person (known as a conservator) will have to claim and manage the money until the minor turns 18.
Conservatorships can be very costly and require annual accountings to the court. In addition, conservators often need to file a bond with the court, which is typically purchased from an insurance company and can be expensive.
Individuals with special needs who receive assets directly can lose valuable government benefits, because once they receive the inheritance directly, more than likely, they will own too many assets to qualify. And, individuals with financial issues or creditor problems can lose the asset through mismanagement or debts.
In such instances, it’s preferable to create a Trust to be named as the beneficiary. The Trustee (who is in charge of the Trust) can claim and manage the asset for your intended recipients for a period of time that takes into account each particular situation.
3. Getting the name wrong (or not exactly right).
Sometimes individuals fill out their beneficiary designation forms incorrectly. There can be multiple people in a family with similar names (such Sr., Jr. and III), but the beneficiary designation form may not be specific. Individuals change their names over time through marriage or divorce, or assumptions can be made about a person’s legal name that later prove incorrect.
Not having names match exactly can cause delays in payouts, and in a worst-case scenario of two people with similar names, it can result in litigation.
4. Forgetting to update your beneficiaries over time.
Who you want to or should name as a beneficiary will mostly likely change over time as circumstances change. Naming a beneficiary is part of an overall estate plan. Just as life changes, so should your estate plan.
Beneficiary designations are an important part of that overall plan, so you want to make sure they are updated regularly.
5. Not reviewing your beneficiary choices with legal and financial advisers.
How beneficiary designations should be filled out is part of an overall financial and estate plan. It’s best to involve your legal and financial advisers to determine what is best for your individual situation.
Remember, beneficiary designations are designed to ensure you have the ultimate say over who will get your assets when you are gone. By taking the time to carefully (and correctly) select your beneficiaries and then periodically reviewing those choices and making any necessary updates, you stay in control of your money … and that is what estate planning is all about, after all.
Tracy A. Craig is a partner and chair of Seder & Chandler's Trusts and Estates Group. She focuses her practice on estate planning, estate administration, prenuptial agreements, guardianships and conservatorships, elder law and charitable giving. She works with individuals in all areas of estate and gift tax planning, from testamentary estate planning and business succession planning to sophisticated lifetime leveraged gifting techniques, such as grantor retained annuity trusts (GRATs), intentionally defective grantor trusts, family limited liability companies and qualified personal residence trusts (QPRTs). Tracy serves in various fiduciary capacities, including trustee and personal representative (formerly known as executor). She also works with clients on issues facing elders.
2024 Election: Tax Plans of the Presidential Candidates
Tax Letter Joy Taylor reviews the tax plans of the 2024 election candidates. With a raft of tax provisions due to expire in 2025, the tax stakes couldn't be higher.
By Joy Taylor Published
Tennis Channel To Serve Up New Streaming Service Next Year
The Tennis Channel's direct-to-consumer streaming service will include live and on-demand matches as well as original programming.
By Joey Solitro Published
Year-End Tax Planning for a Financially Healthier Retirement
Getting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
By Ryan Marston, Investment Adviser Representative Published
Where to Start Financially After a Life-Changing Diagnosis
Dealing with an illness, yours or your child’s or that of another loved one, is hard enough without adding financial duress. Here are some considerations and suggestions for covering expenses.
By Stephen B. Dunbar III, JD, CLU Published
Six Ways to Prepare for Widowhood and Protect the Surviving Spouse
No none wants to have to plan for losing their spouse, but having plans in place and knowing what to do when the time comes can alleviate at least some of the stress.
By Tyler Hill, Investment Adviser Representative Published
Creating a Blended Family? Three Key Steps to Consider
Blended families can make your finances and estate extra complicated, but you can head off some of those issues with careful planning.
By Adam Frank Published
Do You Need Disability Insurance?
If you work for a living, the answer is yes, so don’t overlook protecting your biggest asset. Open enrollment season is the perfect time to assess your options.
By Frank J. Legan Published
Retirement Planning in a Time of Inflation and High Interest Rates
Today’s challenges make retirement planning even more complicated than usual, but it’s not all doom and gloom.
By Ken Moraif, MBA, CFP®, CRPC® Published
Not Confident About Retirement Despite Financial Success?
You’re not alone. Uncertainty related to interest rates, government debt, long-term care and market volatility is making everyone uneasy. What can you do about it?
By Barry H. Spencer, Registered Investment Adviser Published
Risk vs Reward: Understanding This Intricate Investing Dance
The stock market can be unpredictable and complex, so having a good grasp on how to mitigate risk is essential.
By Kerim Derhalli Published