Mistakes with Beneficiary Designations?

It is essential to have your beneficiary designation on a life insurance policy or IRA pay the account at your death as you want.

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. For accounts that have such beneficiary designations, what your will says does not matter.

Kiplinger’s recent article entitled “Beneficiary Designations: 5 Critical Mistakes to Avoid” lists five critical mistakes to avoid when dealing with your beneficiary designations:

1. You are 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 filled 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. Without a proper destination form 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 be paid to your probate estate, which has negative income tax ramifications.
2. Failing to consider special circumstances. Not every family member should get an asset directly. Controls are needed for minor children, those with special needs and people who can’t manage assets or with creditor issues. In such circumstances, creating a trust in a will or your living trust will protect that payment and your loved ones.
3. 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 about a person’s legal name can be made that later prove incorrect. Failing to have names match exactly can cause payout delays, and in a worst-case scenario of two people with similar names, it can result in a court case.
4. 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; just as life changes, so should your estate plan. Beneficiary designations are an important part of that plan—ensure they’re updated regularly.
5. 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.

A beneficiary designation may be a correct choice to provide for your beneficiaries, or it can be a big mistake. Seek out the advice of your attorney to decide how to direct the funds so that what you leave is available for what you intend.

Reference: Kiplinger (June 6, 2022) “Beneficiary Designations: 5 Critical Mistakes to Avoid”