Beneficiary designations cannot be overlooked in estate planning.
Movies and media often misrepresent estate planning.
They tend to focus only on the last will and testament of an individual.
In doing so, it appears this is the only means of distributing wealth.
Nothing could be further from reality.
According to a recent Kiplinger article titled “Beneficiary Designations: 5 Critical Mistakes to Avoid,” some assets utilize beneficiary designations for funneling inheritances to heirs.
Without knowing about these accounts and designations, many people make serious estate planning mistakes with annuities, life insurance policies, retirement accounts, and other assets.
What are common mistakes to avoid with these accounts?
Failing to designate any beneficiary.
When an account allows for a beneficiary designation, many people still fail to do so.
The reasons for this mistake vary.
Some are unaware they are supposed to provide beneficiary designations.
Others forget or simply put off doing so indefinitely.
What happens if a beneficiary is not selected?
In most instances, the company will have rules in place to determine by defaulth where such assets pass after you have died.
With retirement accounts for married couples, the surviving spouse will often be the recipient.
Retirement accounts for single individuals or life insurance will often be paid to the estate of the deceased individual and, consequently, are then included in the probate proceedings.
In this case, there can be significant negative tax outcomes.
Failing to consider unique circumstances.
One commonly overlooked factor is whether a designated beneficiary is a minor child or an adult child with special needs.
Minor children will be unable to legally own and manage these assets until they are adults.
While adult children with special needs may be perfectly capable of managing their own finances, an outright inheritance could disqualify them from government support.
Even those with adult children without special needs may need to reconsider naming an adult child in the beneficiary designations on accounts if this adult child has poor financial management skills and numerous creditors.
Misspelling the name of a beneficiary.
Spelling is important.
Having the correct name updated is also important for those who change their names after a divorce or a marriage.
If you misspell the name of a beneficiary on your form, the account may not be passed directly to the beneficiary when you die.
The payment may be delayed or two people with similar names may fight over the asset in court.
Forgetting to update your beneficiaries.
People come in and out of our lives.
Sometimes there is a relational rift.
Other times a loved one may die.
People may even enter your life through marriage or birth.
It is important to update beneficiary designations and the rest of your estate plan when circumstances and goals change.
Failing to review beneficiary choices with legal and financial advisers.
Your beneficiary designations are not isolated from the rest of your financial and estate plans.
To ensure your designations work with rather than against your goals, you should discuss your choices with your financial advisor and estate planning attorney.
Because beneficiary designations can direct the distribution of significant aspects of your estate, you should be thoughtful in your decisions and review them regularly.
Reference: Kiplinger (June 6, 2022) “Beneficiary Designations: 5 Critical Mistakes to Avoid”