Southwest Florida

Review and Update Your Beneficiary Designations

update your beneficiary designations
Review and update your beneficiary designations regularly to avoid conflict.

Did you forget to review and update your beneficiary designations after a divorce? Your ex will be delighted!

Many people don’t understand that their Will doesn’t control who inherits all of their assets when they die.  Instead, many assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingent beneficiary, who will inherit the asset when you die.

Typical accounts with beneficiary designations are retirement accounts (including 401(k)s, 403(b)s, IRAs, and SEPs), life insurance, and annuities. Many financial institutions also allow you to name beneficiaries on non-retirement accounts;  these are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset without having to wait for probate or estate administration to be completed. However, there are some problems that can occur and mistakes can get expensive.

Here are some mistakes you can avoid if you review and update your beneficiary designations regularly:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t realize they have the option to name a beneficiary. Either way, not naming a beneficiary becomes a problem for your survivors. Each company has its own rules about what happens to the assets when you die without naming a beneficiary. Life insurance proceeds are typically paid to your probate estate, so your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you aren’t married, your retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes will be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This accelerates tax payments that would otherwise be deferred over many years.

Neglecting special family considerations. You may discover when you review and update your beneficiary designations that there are members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance is likely to lose needed government benefits due to the windfall. Therefore, your planning should include a SNT — Special Needs Trust.

Also, minors cannot legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship or guardianship. Conservatorships and guardianships are costly to establish – and the money comes directly out of the assets meant for the minor. The conservator or guardian must also make an annual accounting to the court. The conservator or guardian may also need to file a surety bond with the court, which is an additional expense.

Additionally, if you follow this course of action, your beneficiary may have access to a large sum of money at age 18.  That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to create a trust.  The trustee you name would be in charge of the money for a period of time that you can determine based on the personality and situation of each of your beneficiaries.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. Or they may have a different middle name, which was omitted. A beneficiary may also have changed her name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it can lead to litigation – especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review and update your beneficiary designations with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

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