When creating your estate plan, it's best to name specific beneficiaries to inherit your assets. Your beneficiaries can inherit from your will, trust, life insurance policies, retirement plans, stocks, bank accounts, and other documents.
These are nine things to avoid when naming your beneficiaries.
Naming Beneficiaries to Your Estate
Naming your beneficiaries—the people, or charities, who inherit from your estate when you pass—is important, even if you have a small estate. If you don't name beneficiaries, or if you name the wrong beneficiaries, your estate, or part of it, could end up with people or charities whom you wouldn't have named as beneficiaries.
Here are common mistakes some people make when naming beneficiaries:
1. Being vague about your beneficiaries
When deciding upon beneficiaries, the more specific you are, the better. Describe beneficiaries by name instead of by group. For example, if you want all your children to inherit, name them individually.
Stepchildren aren't beneficiaries unless they're specifically named in your will or other estate documents. Naming each person individually, instead of saying "children" or "grandchildren," eliminates any confusion that could arise.
Also, make sure to identify the proper person, because some relatives will have similar names. If someone is a Jr. or has a number after their name, include those designations.
2. Leaving out beneficiaries' names
You might have many documents that require naming a beneficiary, such as a will, life insurance policies, retirement accounts, and bank accounts, except for joint accounts, where the survivor usually inherits when you pass.
It's smart planning to list a beneficiary on all your accounts. If you fail to name a beneficiary, your estate may take a while to go through probate court, which is time-consuming and expensive, and often causes fighting among relatives. Take the time to ensure that all your accounts have primary beneficiaries.
3. Omitting contingent beneficiaries
Contingent beneficiaries are people, charities, or other entities who inherit only if the primary-named beneficiaries have passed while your estate is going through probate, if they've predeceased you, or, in the case of charities, if they no longer exist.
Naming contingent beneficiaries in a will and in other documents is wise, even for your spouse, because you can't prepare for every situation. Having a contingent beneficiary, or several contingent beneficiaries, allows you peace of mind if nobody can locate your primary beneficiary, or if, for some reason, the primary beneficiary refuses to take your assets.
This way, you'll have people or entities listed as back-ups. This will prevent your assets from going to the wrong people, to people designated by state law, or even to the state itself in some circumstances.
4. Doing your estate planning yourself
When creating an estate plan, even if it only involves a will and a life insurance policy, it's a good idea to have an attorney review it. You'll know that they'll review your accounts to ensure that they list beneficiaries, and you'll know that they'll prepare all your accounts and documents properly. Ask to approve your beneficiaries for each account so that you're not leaving your assets to an ex-spouse or person with whom you're no longer friendly.
5. Designating only one child on each account.
If you want to make sure that each of your children inherits your assets equally, you must name each of them on every instrument or policy you have. For example, naming only one child on your life insurance policy or retirement accounts, with the expectation that the child will share with your other children, isn't a guarantee that your other children will inherit anything.
Likewise, the listed child doesn't have to give them anything. It's better to list all children on each policy, document, or instrument unless you're cutting someone out.
6. Leaving out the manner of distribution
If you want to ensure that each child inherits equally, even if one of your children passes during the probate process or predeceases you, you can list the distribution as per strirpes, which means that your child's children would divide their parent's share.
This allows the surviving grandchildren of one of your children to split their parent's share instead of having an equal share with your other children. Alternatively, a per capita distribution is where every person gets the same amount, no matter whether they're children or grandchildren.
7. Designating a beneficiary who inherits by right of survivorship
If you name a beneficiary in your will to inherit a particular bank account, where the bank account is a joint account with the right of survivorship to the other account holder, that provision in your will cannot be enforced.
The rules of joint tenancy of the bank account will supersede what you've written in the will, so make sure you list beneficiaries who can legitimately inherit from you.
8. Designating an irresponsible beneficiary
When you decide who you should name as a beneficiary, consider whether they'll squander your assets, or will preserve or invest them. If you still want to leave something to someone who can't manage money, you may want to leave it in trust for them.
The trustee can distribute the assets a little at a time. Check with an estate attorney to help you set up a trust.
9. Designating a minor, special needs individual, your estate, or pet as a beneficiary
Having a minor as a beneficiary has its own special issues. A minor cannot inherit directly until they reach the age of majority, so unless you want the probate court to appoint a conservator for their assets, it's advisable to set up a trust for the minor instead.
When naming a person with special needs, if that person is receiving government benefits, an inheritance could disqualify the person from receiving such benefits. Setting up a trust for them is the best way to proceed if you still want them to get your assets. Additionally, it's best to leave your estate out as a beneficiary because naming it requires probate to determine who gets what, which could take time, and there could be large tax consequences if you name your estate.
A pet cannot be a beneficiary, however there are still ways to help make sure they are taken care of after you pass away. You can do so under your last will or a living trust by leaving a specific sum of money to a trust that will be created for your pet after you pass away. In your last will or trust, you can name someone to act as the trustee of the "pet trust" and that person will be in charge of using the funds for your pet’s benefit for the pet's lifetime.
Keeping these common mistakes in mind allows you to prepare your estate so you'll decide ahead-of-time how to properly distribute your estate. That will give you peace of mind that you've done everything possible so the right people inherit your assets in the proper manner.