Estate Planning Minefield: Beneficiary Designations

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.

10 Common Estate Planning Mistakes (and How to Avoid Them)

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.

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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.

Four Ways to Disinherit Family Members

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.

To Gift or Not to Gift

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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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.