Six Beneficiary Mistakes That Could Be Costly

Updating your beneficiary information is important, if you’ve even spent time working with a professional on your estate plan, you know that.  Not updating your beneficiary can result in some costly mistakes, not only for you but also your loved ones.  According to an article in Alicetx.com here are six big mistakes that you can avoid with proactive planning.
1.  Not naming a beneficiary – make sure that you have listed beneficiary designations on all your retirement accounts.  If you don’t name a beneficiary and the estate becomes a beneficiary rather than a relative or loved one, that relative can lose their ability to use the payouts based on their life expectancy.  Probate court also can not be avoided.
2.  Not listing contingent beneficiaries – it’s likely that your spouse or partner is the beneficiary of most of your accounts.  If he or she passes before or at the same time and there is no contingent beneficiary listed, it’s the same as not having a beneficiary and everything will go to the estate.
3.  Lacking specifics in beneficiary designations – If you are part of a blended family, listing specific names is more appropriate than just listing “children”.  Another risk is that relatives that you’ve lost contact with may enter the picture and try to claim a piece of your remaining assets.
4.  Failing to keep designations up to date – Beneficiary designations override your will so it’s crucial to keep them up to date.  It may be necessary to update your beneficiaries every few years due to life changes such as a beneficiary dying or your relationship changing.
5.  Failing to keep beneficiary designation forms on file – Keep copies of updated beneficiary forms on file.  In this age of mergers and acquisitions, the records of an acquired custodial company can potentially be lost or destroyed when ownership changes.  You will need a verifiable form to prove beneficiary status, otherwise the “default” provision will apply.
6.  Not considering the financial or emotional readiness of beneficiaries – Money received from IRA’s and qualified plans is unrestricted in most cases.  You can’t control who gets what amount of money or when, nor limit how it is used unless you place restrictions in advance.  The most common restriction is naming a trust as the beneficiary and having certain stipulations in the trust.

If  you’ve ever spent time working through your estate plan with a professional, you know how important it is to update your beneficiaries. Failing to do so can result in costly mistakes – for you and your loved ones. Here are six big mistakes that can easily be avoided with a bit of proactive planning:

Mistake #1 – Not naming a beneficiary

Ensure you have listed beneficiary designations on all of your retirement accounts. If you don’t name a beneficiary and your estate becomes your beneficiary rather than a relative or loved one, your relative can lose their ability to use “stretch” payouts based on their life expectancy. This means that the ability to retain tax-advantaged status for the assets is lost and the probate process cannot be avoided.

Mistake #2 – Not listing contingent beneficiaries or contemplating disclaimers

Your spouse or partner is likely your primary beneficiary for most accounts, but if he or she passes away first and no contingent beneficiaries are listed, it’s comparable to having no beneficiary designation. If you both die at the same time, funds go into probate – a process most families want to avoid. Naming contingent beneficiaries also gives the primary beneficiary the option to execute a qualified disclaimer so some assets can pass to “next-in-line” beneficiaries. For example, a primary beneficiary may not wish to claim the assets because of tax implications, and prefer instead they pass on to another beneficiary.

Mistake #3 – Lacking specifics in beneficiary designations

You may list “children” as your beneficiaries, but including specific names may be more appropriate – especially if you’re part of a blended family. Many states won’t include or recognize stepchildren when the word “children” is listed. Another risk of vagueness is that a family member you’ve lost contact with may enter the picture and try to claim a piece of your remaining assets. Note that listing specific names makes it even more critical that beneficiary designations are updated when major life events happen that require names be added or subtracted. Also consider consulting with a qualified legal professional, as these circumstances can become complex.

Mistake #4 – Failing to Keep Designations Up To Date

Beneficiary designations override your will, so it’s crucial to keep them up to date. You may need to update your beneficiary designations every few years due to life changes or if beneficiaries have died or your relationship with them has changed. This is particularly applicable if you’ve gone through a divorce or remarried. If your ex-spouse inadvertently remains the designated beneficiary of an account, he or she may have the upper hand if the case winds up in court.

Mistake #5 – Failing to Keep Beneficiary Designation Forms on File

Keep copies of updated beneficiary designation forms on file. In this age of mergers-and-acquisitions, the records of an acquired custodial company can potentially be lost or destroyed when a new firm assumes ownership. Without a verifiable form to prove beneficiary status, the “default” provision of the plan applies, which typically may be phrased as “spouse first, if living; if not, then the estate.”

Mistake #6 – Not considering the financial or emotional readiness of beneficiaries

The money that designated beneficiaries receive from IRAs or qualified plans is unrestricted in most cases. You can’t control who gets what amount of money or when, nor limit how money is used unless restrictions are put in place in advance. One restriction is naming a trust as the beneficiary and drafting terms which stipulate when specific individuals receive their share of the accounts. Trusts are often used in cases where a beneficiary is unable to manage his or her own financial affairs, lacks financial responsibility or in complex family situations.

Estate planning isn’t the most enjoyable part of planning for your financial future, but it is crucial to helping ensure that your assets are handled the way you desire after you no longer have control. Beneficiary designations can be complex and differ depending on your situation. Consider working with a financial advisor who can help you update your beneficiaries on financial accounts and provide financial guidance through major life events.

Estate planning isn’t an enjoyable part of your financial planning but it’s crucial to helping ensure that your assets are handled the way you want after you have no control.  Beneficiary designations can be complex and differ for each situation.  Financial planners can help you update your beneficiaries on financial accounts and provide financial guidance through major life events.

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