Beneficiary Designations Mistakes To Avoid

Beneficiary Designations Mistakes To Avoid
Categorized as Estate Planning, Sterling Tax Advisors Tagged

One of the most basic functions of estate planning is naming beneficiaries. Surprisingly, this can be more complex and require more ongoing maintenance/review than you might think. There are common beneficiary designation mistakes you will want to avoid. So, while it is easy to initially tell your advisor who you want the estate to pass onto, life keeps happening, and circumstances could change your decisions. You want to ensure that you are able to change designations without adversely affecting the estate.

Divorces, deaths, adoptions, minors becoming adults, a new interest in a charitable organization, all these events can impact your distribution plans. The time to speak to your advisor is when the event actually occurs. Please don’t put it off. Without your input, your plan assumes that life hasn’t changed and will deliver on your original wishes.

Beneficiary Designations Vs. Will Beneficiary

Further confusing the issue is the difference between beneficiaries named in your Will or Trust and beneficiaries you named in financial products like retirement accounts, portfolios, and life insurance products. When you purchased these products, the organization that owns and runs the product asked you for a primary beneficiary and contingent beneficiaries. 

These products are separate legal contracts, and the proceeds are paid directly to the named beneficiary bypassing probate. Because they are separate legal documents, an estate executor cannot challenge them as they can on claims made in the Trust.

Sometimes, particularly with life insurance products, the named beneficiary is “the estate of” meaning the proceeds are paid to the estate, and the estate distributes it per the beneficiaries named in the Will or Trust.

To avoid conflicts and assure your wishes are met, it is essential to coordinate named beneficiaries in your Will with those in financial products you may have.

Common Beneficiary Mistakes You Want to Avoid

Mistakes can happen, and when they do, they typically result in a delay of payment, possible tax exposure, or in the worst case, assets being paid to someone you didn’t want to share in your estate. Many of the mistakes are simple and easy to overlook at the time they are made. If deciding who gets what when you are gone is important, you need to examine who and how your beneficiaries are named carefully.

  • Not Naming a Beneficiary. Maybe you overlooked the application line or simply failed to provide the required paperwork. Not naming a beneficiary on a financial product will typically result in the proceeds being paid to the estate, which means it is subject to probate.
  • Naming a Minor or Person With Special Needs. Minors can’t be a party to a contract. Minors who are named beneficiaries will be assigned a court-appointed conservator to receive and manage the money until the child is 18. Likewise, adults who have special needs and are receiving valuable government benefits may lose those benefits because they now have too many assets. In both cases, it is smarter to establish trusts for them and have the trust named as the beneficiary.
  • Getting the Name Wrong. Family names can be similar, family names can change due to marriage and divorce, and family names can simply be incomplete. Ensure each beneficiary has one or more identifiers, such as SSN or DOB, attached to the name.
  • Failure to Review Beneficiaries Over Time. We have already covered this, but it is important. Life goes on, and unless you regularly review your named beneficiaries with your legal or financial advisor, you are stuck in the past, and you won’t be able to fix mistakes after you are gone.

You have made a lot of correct moves and decisions in your life. Make sure that the last one you make reflects your record of success and care for your family. If it is time to review your named beneficiaries, contact us at the William Rogers Company for a professional evaluation. We are here to  ensure your legacy is passed on the way you wish it to. Call us at 888-297-3321.