Special Needs

Common Mistakes with Beneficiary Designations

Questions about beneficiary designations are among the most common we hear from new clients in our law practice.  This is a topic that should be among those discussed by an estate planning attorney during your first meeting.

Many people don’t understand that their will doesn’t control who inherits all of their assets when they pass away. Some of a person’s assets pass by beneficiary designation. That’s accomplished by completing a form with the company that holds the asset and naming who will inherit the asset, upon your death.

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Assets with a beneficiary designation will not be distributed according to your will.

Kiplinger’s recent article, “Beneficiary Designations: 5 Critical Mistakes to Avoid,” explains that assets including life insurance, annuities and retirement accounts (think 401(k)s, IRAs, 403bs and similar accounts) all pass by beneficiary designation. Many financial companies also let you name beneficiaries on non-retirement accounts, known as TOD (transfer on death) or POD (pay on death) accounts.

Naming a beneficiary can be a good way to make certain your family will get assets directly. However, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company, because mistakes can be costly. The article looks at five critical mistakes to avoid when dealing with your beneficiary designations:

  1. Failing to name a beneficiary. Many people never name a beneficiary for their retirement accounts. If you don’t name a beneficiary for retirement accounts, the financial company has it owns rules about where the assets will go after you die. For retirement benefits, if you’re married, your spouse will most likely get the assets. If you’re single, the retirement account will likely be paid to your estate, which has negative tax ramifications and may need to be handled through the costly and time-consuming probate courts. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This means an acceleration of the deferred income tax—which must be paid earlier, than would have otherwise been necessary.
  2. Failing to consider special circumstances. Not every person should receive an asset directly. These are people like minors, those with specials needs, or people who can’t manage assets or who have creditor issues. Minor children aren’t legally competent, so they can’t claim the assets. A court-appointed conservator will claim and manage the money, until the minor turns 18. Those with special needs who get assets directly, will lose government benefits because once they receive the inheritance directly, they’ll own too many assets to qualify. People with financial issues or creditor problems can lose the asset through mismanagement or debts. Ask your estate planning attorney about creating a trust to be named as the beneficiary.
  3. Designating the wrong beneficiary. Sometimes a person will complete beneficiary designation forms incorrectly. For example, there can be multiple people in a family with similar names, and the beneficiary designation form may not be specific. People also change their names in marriage or divorce. Assets owners can also assume a person’s legal name that can later be incorrect. These mistakes can result in delays in payouts, and in a worst-case scenario of two people with similar names, can mean litigation.
  4. Failing to update your beneficiaries. Since there are life changes (like marriage and divorce for example), make sure your beneficiary designations are updated on a regular basis.
  5. Failing to review beneficiary designations with your estate planning attorney. Beneficiary designations are part of your overall financial and estate plan. Speak with your estate planning attorney to determine the best approach for your specific situation.

Beneficiary designations are designed to make certain that you have the final say over who will get your assets when you die. Take the time to carefully and correctly choose your beneficiaries and periodically review those choices and make the necessary updates to stay in control of your money.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is an aspect of estate planning that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingency beneficiary, who will inherit the asset when you die.

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If you don’t update your beneficiaries after a divorce your ex will receive some of your assets.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes could be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship. Conservatorships are costly to set up. They must also make an annual accounting to the court. Conservators may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

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