We share beneficiary mistakes to avoid to keep your family safe and out of probate.
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It is surprisingly easy and common to make mistakes when designating beneficiaries on retirement and investment accounts. While you may think it isn’t a big deal, mistakes with beneficiaries can be quite costly. You may inadvertently disinherit a loved one or leave money to an ex-spouse. With more than 220,000 Americans dying from COVID, it may be time to revisit your beneficiary selections. Keep reading to find out the costly beneficiary mistakes you need to avoid.
Even for those who have done extensive estate planning, mistakes with beneficiaries can pop up. A will does not control who retirement accounts are passed on to, for example. Similarly, a will can force your estate into probate, which can be costly and time-consuming. For those with a living trust, if the trust is not funded properly, some assets may still need to go through probate. Retirement accounts, and a few other types of accounts, will best be passed (in many cases) via beneficiary.
Accounts including 401(k)s, IRAs, Roth IRAs, life insurance, annuities, and other retirement accounts pass by beneficiary designation. In addition, you can also name beneficiaries on your other non-retirement investment accounts, which are known as Transfer on Death (TOD) accounts. Using a beneficiary designation may allow your heirs to receive your assets in a more tax-efficient manner if they so choose.
1. Forgetting to Name a Beneficiary
Especially when you are young and healthy, it is easy to put off thinking about who your beneficiaries should be. This causes many people to never get around to naming a beneficiary. When no beneficiary is named, typically, the assets will be paid via probate via your estate, which can be costly and time-consuming. More importantly, your assets may not end up where you wanted them.
Updating and changing your beneficiaries is a fairly easy process; assuming you remember to do it. Regardless, make sure to at least name someone as your beneficiary. For married couples, it is assumed that your assets will go to your spouse if you pass but listing them as a beneficiary will eliminate one headache in what will surely be a difficult time. You should also consider adding a contingent beneficiary.
2. Ignoring Special Circumstances
As a financial planner, I am here to help my clients make the wisest financial decisions, not tell them who should inherit their assets. That being said, I have worked with many people who knew a loved one shouldn’t be given a large chunk of money. Reasons included things like mental illness, drug addiction, creditor issues, and disability. In other cases, minor children are not legally able to directly handle the money until they reach the age of 18. A court-appointed conservator might be needed, which is another ongoing and costly expense.
If your loved one has special needs and is receiving government assistance, a large inheritance could cause he or she to lose government aid. In cases like this, it can be beneficial to create a living trust and name it as the beneficiary. Your trustee can manage the trust for your intended beneficiary in a way to avoid losing government aid.
3. Not Naming the Right Beneficiary
If your loved one has a name like John Smith, you will want to make sure to include further identifying information when naming a beneficiary. This can include information like birthday, social security number, and various other contact information, as well as the beneficiary’s relationship to you. Not having a clearly named beneficiary may cause delays in payouts, or worse, the money could go to the wrong person.
4. Never Updating Your Beneficiaries
I’ve been amazed at the things I’ve seen when reviewing beneficiary designations with clients. I had a mother of six adult children, who had only named her first child as the beneficiary of a large life insurance policy. She purchased it when she first became a mother and didn’t update it after having five more children.
In another case, I spoke with a man who was on his third marriage, but most of his accounts still listed his first wife as his beneficiary. I won’t share what he thought of his first wife, but let’s just say he was happy to no longer be married to her and would be quite upset if she received any money from his estate.
Will, who you would like to be your beneficiary, will likely change over time? As your life changes, so should your beneficiaries. Set a calendar alert to review your beneficiaries every few years. Also, make a point to update them now if you have gone through a life change – think marriage, divorce, death in the family, addition to the family, and so on.
5. Not reviewing beneficiary designations with your legal, tax, and financial advisers.
Some loved ones may benefit more than others from inheriting certain assets. Likewise, for those with larger estates, proactive estate planning can help keep more of your assets away from the taxman. Your financial planner should be able to help you with tax planning in regard to your estate and how to most efficiently pass it to your loved ones.
While I do think people should put some time and thought into who they want to inherit their assets, the process of updating or naming a beneficiary will take just a few minutes. This will also help ensure your wishes are followed when you are no longer here to control your assets. Take the time to avoid the aforementioned five beneficiary mistakes.