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Mistakes to Avoid When Naming Beneficiaries

Posted by Dana Law Group on February 12, 2021

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One of the biggest challenges you will face when you are setting up your estate planning is who to name as your beneficiaries. For many, it may seem like a clear-cut answer, but it’s essential to ensure you are naming your beneficiaries properly to prevent problems when your estate is handled, as well as to ensure your wishes are followed. It’s not necessarily a process you do once and forget about either. When life changes occur, adjustments may be required. The following are some mistakes you should avoid when naming your beneficiaries.

Not Naming One

Many people mistakenly believe they know exactly where their estate will go after their passing and don’t name a beneficiary at all. This is a major mistake. Some parts of your estate, including life insurance policies and retirement funds, may have a default beneficiary. It’s essential to make sure these align with your wishes, rather than just relying on the default option. In the case of retirement accounts, not naming a beneficiary can also come with tax consequences.

Making Your Estate the Beneficiary

If you make your estate the beneficiary, everything will need to go through the probate process, which not only means a lengthy process, but could also produce less-than-desirable results. Naming a specific person as a beneficiary, whether a spouse or someone else, allows recipients to choose between a lump sum or payment over five years. Both have tax consequences, but individual tax requirements are far less than estate requirements. For instance, a spouse can roll over a retirement account into one of their own without paying many tax penalties.

Outdated Beneficiaries

Whether you’ve had more children, a beneficiary has passed away or there has been another major life change, keeping your beneficiaries updated is essential to prevent future problems. Also pay attention to contingent beneficiaries. If something happens to your primary beneficiary, without making changes, the contingent beneficiaries will move up the list.

Naming Minors Directly

Many parents leave all or some of their estate to minor children. However, it’s a mistake to name them directly. Instead, it’s better to either name someone trustworthy who can manage the funds for them or set up a trust for the money to go. If you do name minor children directly, they will not receive their funds until they reach the age of 18 or 21, at which time they may not be equipped to handle a large windfall properly.

Special Needs Beneficiaries

The same applies to directly naming a special needs individual as a beneficiary. However, there’s another reason for this as well. If a person with special needs who is receiving government assistance receives an inheritance, it can disqualify them for the income requirements of these programs, causing serious consequences and loss of support. It’s better to set up a trust for their caretakers to use for their care and support.

Naming an Account Co-Owner

It’s not unusual for elderly individuals to add an adult child to their bank accounts or even retirement accounts to help them manage their finances. Unfortunately, as soon as you do so, you’re setting them up to gain all that money upon your passing, even if you intend to split it between multiple people. Naming a power of attorney for these purposes will allow you to get the help you need, while ensuring proper distribution of your estate later.

Naming Separate Beneficiaries or Just One

If you have multiple holdings that require a specific beneficiary, some individuals name a unique beneficiary for each account or simply put one person on all account. Not only can this create an unfair advantage for your beneficiaries if one account is larger than another, but if you only name one person on all your accounts, that person is not obligated to divide your assets. It’s important to put all of your beneficiaries on every account to ensure an equitable split or your preferred split.