In light of the current uncertain world we are living in, it has reminded us that now is as good a time as ever to review our estate plans and ensure everything is in order. Today we are looking at common mistakes when naming beneficiaries on accounts such as IRAs, 401(k)s, annuities, and insurance policies.
Despite what many people think, directions in your Will do not control who inherits these accounts. A beneficiary designation is necessary and is done by completing a form from the company holding the asset. Naming a beneficiary is an easy task, but if not done correctly it can cause many problems.
We’ve addressed this issue in the past (IRA Beneficiary Form Mistakes) but feel strongly about helping you; therefore we’d like to highlight five common mistakes people make when naming a beneficiary.
- Not naming a beneficiary
Many people incorrectly assume their final Will will direct the assets of their retirement accounts or life insurance policy upon their death and do not designate a beneficiary. Another reason people do not name a beneficiary is they may not realize they can name a one, or they simply forgot.
A huge benefit of naming a beneficiary is passing your assets directly to an individual which avoids probate. Probate is a long, expensive process that you want to avoid if possible. Many retirement plans and insurance companies will have their own “default” beneficiary as outlined in each specific plan. This may be inconsistent with your wishes. In both cases, there could also unintended tax consequences.
- Naming one beneficiary for all accounts or separate children as beneficiaries for separate accounts
Some parents think they will divide their accounts up by naming a separate beneficiary for each of their accounts. This is not a great plan, as over time, account balances can vary greatly and can result in each child receiving different amounts, which may not have been the parent’s intention.
Also, parents can make the mistake of choosing to name one child as a beneficiary for all accounts, with the thought that this child will then equally distribute the balance among siblings. Often times with the thought that this child is more financially responsible and can take better care of the payout to benefit all of the siblings. There are several errors to this thinking, one being that the child receiving the monies has no legal obligation to distribute any of the inheritance. Moreover, if the child does distribute the monies to their siblings, there will likely be gift tax consequences which could have been avoided with an appropriate beneficiary designation.
The above situations could simply be solved with completing a beneficiary designation form to be distributed “per stirpes” to all children. This means equally among all children to ensure each child (even an equal share for deceased children) receives an equal amount. If there is still concern over the financial capabilities of the child, it would be best to create a trust for the inheritance to be held in with specific distribution instructions and restrictions. A trusted estate planning lawyer should be consulted to create such a trust.
- Naming a minor or special needs beneficiary
Unfortunately, no one can stop you from naming a minor as a beneficiary; however, financial institutions cannot pay benefits directly to a minor. This means the court will assign a custodian or conservator to manage the inheritance until the minor reaches the age of 18 or 21 (depending on state law). Conservatorships require annual reporting to the court and can be costly. Additionally, when your beneficiary reaches age, will they be able to responsibly handle a potentially large sum of money?
Also, you may have the best intentions when naming a special needs individual as a beneficiary, but you could be doing them more harm than good. More than likely, receiving your inheritance directly will disqualify them from receiving their current government benefits.
In both of these instances, establishing a trust for the inheritance to be held is your best option. An estate planning lawyer can help you create the trust and detail out your distribution instructions. Your estate planning lawyer can also help you determine if creating a trust specifically for your special needs beneficiary is in his or her best interest as to not affect their government assistance. You will name a Trustee who is in charge of executing your wishes for the trust and making financial decisions in the best interests of people listed in your trust.
- Not updating beneficiaries
Life changes often and not updating your beneficiaries as circumstances change can be a big mistake. Major life changes (marriage, birth, death, divorce) are the most common reason to review and update the beneficiaries on your financial accounts and life insurance policies. You’d hate to give part of your estate to someone no longer in your life.
- Not consulting with financial and legal advisors
How you choose to designate beneficiaries across your financial accounts and life insurance policies should be part of your overall financial and estate plan. It’s best to meet with your advisors and devise a specific plan (i.e. drafting trusts, etc.). As stated in the previous point, this plan should also be periodically reviewed with your attorney and financial advisor to determine if your needs or priorities have changed.
If you are looking for trusted Will and Trust lawyers in the Savanah, GA, area, please contact us today. We are happy to help create a plan that works for you!