9 Things to Avoid When Naming Your Beneficiaries
9 Things to Avoid When Naming Your Beneficiaries
Depending on your circumstances, the naming of your beneficiaries—the people you have chosen to inherit your assets—can be one of the easiest or most challenging aspects of putting together a comprehensive estate plan. If you don't have many family members to whom you'll be leaving property or other assets, you may not be especially worried about this part of the process, but you should still be paying attention.
Some mistakes made while naming beneficiaries can have grave tax consequences for your estate, for your beneficiaries, or for both. You also may inadvertently tie up estate assets for years or leave certain assets to someone you hadn't intended on giving them to. Even conscientious individuals can make mistakes when naming beneficiaries in their estate plans, and here are nine of the most common ones to avoid.
1. Not Naming a Beneficiary
Neglecting to name a beneficiary could mean that default provisions in a life insurance policy, banking or investment account, or retirement plan kick in—and the resulting beneficiary may not be the one you had in mind. Probate, the court-supervised process to administer a deceased person's estate, will ensue, which means a longer, more costly, and sometimes emotionally charged process to determine who will receive your property.
You also may face unnecessary tax issues if you fail to name a beneficiary on a retirement account, so pay special attention to make sure you've expressed your beneficiary wishes.
2. Not Updating Your Beneficiaries
Life happens, and life includes births, marriages, deaths, and divorces. You probably don't want your ex-spouse to receive assets from your estate just because you failed to update your beneficiaries following the divorce, and you may need to replace any beneficiaries who predecease you. Moreover, if you have named your children specifically in your estate plan and have since had a baby, you probably want to make sure the newest member of the family is included in your plans as well.
3. Not Naming People Specifically
While naming your children specifically can get you into trouble if you're not careful about updating your beneficiaries as described above, you also could experience undesired consequences by not referring to individuals by name. For example, if you have said "children," but you also meant to include your second wife's children—that is, your stepchildren—as beneficiaries, you will have inadvertently disinherited your stepchildren by not naming them specifically.
4. Not Naming Contingent Beneficiaries
Failing to name someone as a contingent beneficiary to inherit your assets in case the primary beneficiary predeceases you or dies at the same time as you is a common mistake—especially among couples who name their spouse as the primary beneficiary without naming a contingent beneficiary. With no contingent beneficiary, if your primary beneficiary predeceases you, it's as if you haven't named a beneficiary at all.
Even if you have multiple primary beneficiaries, you can plan for a catastrophic event by naming contingency beneficiaries as well, just in case.
5. Having Conflicting Beneficiary Designations
Your estate plan must be comprehensive to cover everything you want it to, and it must also be consistent. That is, if you want your children to inherit your assets equally but then you name only one of them as a beneficiary on your retirement account, that's not going to end up being an equal division. Your beneficiary designation on the account will override your expressed intention in your will, as it will apply no matter what your last will and testament says.
6. Naming a Beneficiary on a Joint Account
If you have an account that has two owners, both must die before the beneficiary will inherit. Accordingly, if a mother planned to have her daughter be the beneficiary of her bank account but, toward the end of her life, added her son as a joint owner of the account for ease of administration while she was in the hospital, the son would remain the owner of the account upon the mother's death—and the daughter would not be entitled to inherit until her brother also passed away.
7. Naming Minors as Beneficiaries
Minors will not receive the proceeds of a life insurance policy or other account directly until they reach the age of majority in your state, either 18 or 21. You may not want them to receive that lump sum at that point either, but—if you didn't want that to happen—establishing a trust would have been a better vehicle than naming them directly as beneficiaries.
8. Naming Special Needs Individuals as Beneficiaries
A special needs individual who inherits funds directly as a beneficiary could find themselves suddenly disqualified from receiving government benefits for their disability. Again, a trust is probably a better option to make sure a special needs individual receives a portion of your estate.
9. Naming Pets as Beneficiaries
Just as with minors, pets cannot inherit property directly, but you can set up a pet protection agreement to make sure your favorite animals are taken care of once you're gone.
One of the best things you can do to make sure all of your loved ones are taken care of after your death is to get your estate in order, and, in the process, you also can give yourself the gift of incredible peace of mind knowing you've done all you can.
If things aren't done correctly, your planning could end up doing more harm than good, so it's important to speak with professionals to ensure that your beneficiaries are properly named and primed to receive the assets you want them to get at the time you want them to receive them. A little planning now can mean a lot fewer headaches and a lot less stress for your loved ones later.