No matter what kind of estate plan you use, your plan can be undone by some common mistakes when making beneficiary designations. Modern banking and worker economics also means that a lot of your financial value, usually in retirement accounts like IRAs or 401(k)s for example, are governed by beneficiary designations. That means one mistake affects a huge portion of your financial worth. Many events make it necessary to review beneficiary designations, as the author in the article “One Beneficiary Mistake You Really Don’t Want to Make” from Kiplinger points out.
Now, there is no definitive guide on how to handle beneficiary designations. The best solution is to review them with your estate planning attorney to ensure the designations fit your estate plan. However, this article will cover some common mistakes that can undo even the best of estate plans. You may also want to review some common estate planning mistakes as they somewhat overlap. See here for more info: https://www.galliganmanning.com/what-estate-planning-mistakes-do-people-make/
Life Changes. Any time you experience a life change, including happy events, like marriage, birth or adoption, or unhappy events such as the death or disability of a loved one, you need to review your beneficiary designations. If there are new people in your life you would like to leave a bequest to, like grandchildren or a charitable organization you want to support as part of your legacy, your beneficiary designations will need to reflect those as well. A very common and likely very obvious mistake is to not review and update your beneficiary designations after one of those events.
For people who are married, their spouse is usually the primary beneficiary, but do you have a contingent? Beneficiary designations typically have multiple tiers. The first person to receive is the primary beneficiary. For married couples, this is typically the other spouse. However, many clients forget to include contingent beneficiaries to receive if the primary is deceased. Children are often contingent beneficiaries who receive the proceeds upon death if the primary beneficiary dies before or at the same time that you do. But, a lack of a beneficiary is a big problem and many companies direct to the proceeds to your estate, which I’m guessing isn’t what you wanted.
It is also wise to notify any insurance company or retirement fund custodian about the death of a primary beneficiary, even if you have properly named contingent beneficiaries, or even better, just update the beneficiary designation to remove the deceased beneficiary’s name.
Not understanding the financial institution’s terms. Clients often ask what will happen if a named beneficiary of their retirement account dies. Who does it go to next? I always have the same answer, what do the account policies say? For example, let’s say you’re married and have three adult children. The first beneficiary is your spouse, and your three children are contingent beneficiaries. Let’s say Sam has three children, Dolores has no children and James has two children, for a total of five grandchildren.
If both your spouse and James die before you do, all of the proceeds would pass to who? It could be your two surviving children, and James’ two children would effectively be disinherited. That might not be what you would want. It is also possible that the assets go to the children of the predeceased child.
The difference between these are the difference of what are typically termed per stirpes and per capita. Some companies allow you to indicate your preference, but not always. So, you’ll need to speak with the company to better understand how their designations are ruled.
Not incorporating into your estate plan. Finally, and I made this point briefly in the introduction, you want to coordinate your beneficiary designations and your estate plan. For example, many clients utilize trusts for their beneficiaries to provide them creditor and divorce protection. If your life insurance policy goes directly to your child, that money will not receive the creditor and divorce protection the trust affords. So, arranging the beneficiary designations so that the insurance proceeds will go to that trust protects that money as well.
These are some common mistakes in making beneficiary designations. Your estate planning attorney will help review all of your assets and means of distribution, so your wishes for your family are clear and effective.
Reference: Kiplinger (March 23, 2021) “One Beneficiary Mistake You Really Don’t Want to Make”