Many people don’t know that their will doesn’t control who inherits all of their assets when they die. Some assets pass by beneficiary designation. Assets like life insurance, annuities and retirement accounts all pass by beneficiary designation. The companies who sell or manage those types of investments are diligent at letting you know you need to choose a beneficiary designation, but it’s up to you to take that action, according to Beck & Lenox Estate Planning and Elder Law, LLC. Kiplinger’s recent article entitled “Beneficiary Designations: 5 Critical Mistakes to Avoid” lists mistakes to avoid with beneficiary designations:
- Failing to designate any beneficiary at all. Many people forget to name a beneficiary for retirement accounts or life insurance. They may forget, didn’t know they had to, or just never got around to filling out the forms. If you don’t name a beneficiary for life insurance or retirement accounts, the company will apply its rules about where the assets will go after you die. For life insurance, the proceeds will typically be paid to your probate estate. For retirement benefits, if you’re married, your spouse will most likely receive the assets. However, if you’re unmarried, the retirement account will likely be paid to your probate estate, which has negative income tax ramifications.
- Failing to consider special circumstances. Not every family member should get an asset directly. This includes minor children, those with specials needs and people who can’t manage assets or with creditor issues.
- Misspelling a beneficiary’s name. Beneficiary designation forms can be filled out incorrectly and the beneficiary designation form may not be specific. People also change their names through marriage or divorce, or assumptions can be made about a person’s legal name that later prove incorrect. Failing to have names match exactly can cause delays in payouts, and in a worst-case scenario of two people with similar names, it can result in a court case.
- Forgetting to update your beneficiaries. Your choice of beneficiary may likely change over time as circumstances change. Naming a beneficiary is part of an overall estate plan, and just as life changes, so should your estate plan. Beneficiary designations are an important part of that plan—make certain that they’re updated regularly.
- Failing to review beneficiary choices with legal and financial advisers. How beneficiary designations should be completed is a component of an overall financial and estate plan. Involve your legal and financial advisers to determine what’s best for your circumstances. Note that beneficiary designations are designed to guarantee that you have the ultimate say over who will get your assets when you pass away. Taking the time to carefully (and correctly) choose your beneficiaries and then periodically reviewing those choices and making any necessary updates will allow you to remain in control of your money.
As part of your estate planning, your estate planning attorney should, like the attorneys at Beck & Lenox, be willing to sit down with you every few years to review all your legal and financial documents to make sure everything remains in order and up-to-date. Beneficiary designations are one of many items that they are trained to review.
Reference: Kiplinger (June 6, 2022) “Beneficiary Designations: 5 Critical Mistakes to Avoid”