Usually, the final step in opening up a life insurance policy, annuity or IRA is filling out the Beneficiary Designation Form. Chances are, you filled out the form quickly and didn’t give it much thought. But that can be dangerous. The beneficiaries you list on an account are incredibly important, because by naming beneficiaries, you are creating an estate plan for that account. In other words, an account with named beneficiaries bypasses a will or a trust (unless the beneficiary is in fact your estate or trust!). The key message is the following: Your beneficiary designations should not be an afterthought.
In no particular order, here are five common mistakes I see with beneficiary designations:
1. Failure to review periodically and not updating when needed: You should review your beneficiary designations every 3-5 years, just as you would your will, trust and powers of attorney. Too many of us review the beneficiaries only when we open the account. If the institution/custodian changed hands, are you sure the new custodian has the beneficiaries listed properly (i.e., from Wachovia to Wells Fargo)? I had a client a few years back who was surprised to find out that the custodian had beneficiaries listed for her account, but she had no idea who the named people were! It was a mistake by the custodian, but thankfully, we caught it. Even if you think you have the correct beneficiaries, why not be 100% sure? If the beneficiaries are wrong or incomplete, then that account will not go to the proper individuals, even if your will or trust has the correct people listed. Beneficiary designations always take precedence over the estate plan.
2. Failure to name contingent beneficiaries: Don’t forget contingent beneficiaries. What happens when the primary beneficiary is deceased or unable to collect the inheritance? You want to make sure you name contingent beneficiaries. For retirement accounts such as IRAs, failure to name contingent beneficiaries can be costly. One example of this mistake is naming your spouse as primary beneficiary, but if he/she is deceased, and you don’t have your kids listed as contingent beneficiaries, the IRA will have to be cashed out and all taxes paid immediately. That’s a major tax disadvantage for your children, because they would’ve had the opportunity to defer the taxes if they were named as beneficiaries.
3. Failure to consider a trust: Sometimes, beneficiaries cannot or should not handle the money and funds they’ll receive from your accounts where they’re designated as a beneficiary. In that case, a trust should be considered. If you establish a trust to hold assets, you have to make sure the beneficiary designations name the trust. If you establish a trust but leave the beneficiaries as they are, with the individual persons listed, the trust will not protect the funds.
4. Failure to have a current list/summary of your beneficiaries available for your Executor/Trustee: Lists and summaries are extremely beneficial to your Executor and Trustee. If possible, make a list of each account and asset you own. In particular, with accounts that have beneficiaries, write a summary of the beneficiaries, including primary, contingent, and percentages they will be receiving. When it’s all on one or two pages, the Executor can quickly act and ensure all beneficiaries receive their funds quickly. But, make sure you keep your list updated as things change in your estate. There’s nothing worse than outdated information.
5. Not understanding how these accounts fit into your estate plan: Make sure you understand your estate. Some assets will pass through a will, while others won’t. This bears repeating: Any accounts with beneficiaries designated will bypass the will, unless you specify that the asset is designated for your estate. There are a few issues to consider. Do you want your account beneficiaries to be the same beneficiaries that are in the will? Do you have enough assets that will be part of your estate (rather than go right to the beneficiaries) so that the estate can pay taxes, creditors and final expenses? These are just a couple of questions among many others that need to be asked in conjunction with doing estate planning.
As you can see, it’s not as simple as just writing a few names down on a form. The beneficiary designations should be taken as seriously as writing a will or trust, and your attorney should speak to you about these accounts and beneficiary designations. If you need assistance and this article has left you with more questions than answers, contact our office to schedule your consultation today at (215) 706-0200.