retirement

Beneficiary Designations – The Overlooked Minefield of Estate Planning

Who knew so many things could go wrong? Well, they can. Here are some of the main mistakes to avoid and the best practices to follow instead.

Most consumers are familiar with the beneficiary designation form they complete when opening an IRA or 401(k). The form designates who receives the asset if the account owner dies. Yet, these forms can create confusion, unintended bequests and family turmoil if not adequately monitored.

A variety of account types are governed by beneficiary designation. Life insurance, 401(k)s, IRAs and annuities are the most common investment accounts that contain contractual provisions that determine who receives the asset upon the death of the owner.

Here are several of the mistakes I see people make with beneficiary designations and some tips to avoid problems for you or family members.

Thinking Your Will Has More Power Than It Does

Many consumers mistakenly believe their will takes precedent over any beneficiary designation form. A will governs assets of one’s probate estate. Accounts with contractual beneficiary designations are not governed by will because they pass outside of probate. We advise clients to review their beneficiary designations anytime they revisit their will.

Letting Accounts Fall Through the Cracks

Inattention is another factor that can lead to unintended outcomes. Prior employer 401(k) accounts are sometimes “orphaned,” meaning that they remain with the old employer and aren’t updated to reflect new realities. Last year I met with a prospective client who had three different 401(k) accounts from old employers going back over 20 years. When we reviewed the accounts, we discovered his ex-wife (from whom he had been divorced over 15 years) was the primary beneficiary of one of his accounts.

Failing to Plan for Contingencies

Another area people fail to give proper consideration is anticipating a beneficiary predeceasing them. I recently learned of a situation where a friend’s 92-year-old mother passed away. She had three children, one of whom had predeceased her a few years ago. Her IRA (worth well over $1 million) named her three children as equal beneficiaries. However, on the form she had not indicated a per stirpes or per capita election.

As a result, her two surviving children split the IRA proceeds equally, with the children of her deceased child receiving nothing. The family is now involved in expensive litigation and bitter feelings among family members.

Some Best Practices to Take to Heart

According to Raleigh, N.C., estate planning attorney Chris Morden, following these “best practices” helps ensure proper coordination of one’s estate plan:

  • Keep copies of all communications when updating beneficiary designations by mail or online. Copies of correspondence, website submissions and any confirmations received from providers should be kept with estate planning documents in a safe location.
  • should review their estate plans (including beneficiary designations) every three to five years. Since 2020 is a leap year, it provides a great review marker going forward.

Effective estate planning extends beyond one’s will and requires periodic review. If neglected, something as mundane as beneficiary designations can upend your intentions, create confusion and breed family resentment.

About the Author

Mike Palmer, CFP

Managing Principal, Ark Royal Wealth Management

Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.

Most Popular

Senate Passes $3,000 Child Tax Credit for 2021
Coronavirus and Your Money

Senate Passes $3,000 Child Tax Credit for 2021

The provision would temporarily increase the child tax credit to $3,000 or $3,600 per child for most families and have 50% of it paid in advance by th…
March 6, 2021
Senate Passes Bill with More "Targeted" Stimulus Payments
Coronavirus and Your Money

Senate Passes Bill with More "Targeted" Stimulus Payments

The Senate finally passes the $1.9 trillion COVID-relief bill. But fewer people will get a third stimulus check under the Senate version than under th…
March 6, 2021
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021

Recommended

Having the Money Talk with Your Parents, with Cameron Huddleston
Financial Planning for Alzheimer's

Having the Money Talk with Your Parents, with Cameron Huddleston

Managing your parents' finances can be a difficult situation. Doing so if you haven't laid down a plan for how to do it is worse.
March 2, 2021
Love and Money with Financial Planner Mari Adam
Getting Married

Love and Money with Financial Planner Mari Adam

Financial planner Mari Adam helps couples work together to have a good relationship with each other – and their finances. Also, some twists for 2020 t…
February 25, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
February 24, 2021
Switch Accounts for a Better Yield?
Financial Planning

Switch Accounts for a Better Yield?

If your current account has a reliable history of strong yields, it might be worth sticking around.
February 23, 2021