Common Mistakes Made When Using Beneficiary Designations

No Beneficiaries Named

Whether by oversight or laziness, a surprising number of retirement accounts and life insurance do not have beneficiaries designated. The reason could be people may not realize they can name a beneficiary, or they just never get around to filling out the forms.

If you fail to a beneficiary for your life insurance or retirement accounts, then the financial company has its owns rules about where the assets will go after you die. For life insurance, typically the proceeds will be paid to your probate estate. This means that your family will need to hire a lawyer, go to court and probate your estate to claim the proceeds.

For retirement benefits, if you're married, your spouse will most likely receive the assets. But, if you're not married, the retirement account will likely be paid to your probate estate, and that has undesirable income-tax ramifications. When an estate is the beneficiary of a retirement account, all of the assets will need to be paid out of the retirement account within five years of death. This will cause an immediate acceleration of the deferred income tax, which will have to be paid earlier than would have otherwise been necessary.

Filling Out the Form Wrong

Beneficiary designation forms are different at every financial institution and each one has its own rules for interpreting these forms. Typically, no one offers any valuable assistance in filling them out. Oftentimes we complete these forms online without any human guidance at all. Sadly, when you die, whatever is on that form dictates how that asset passes, even if you did it wrong. Sometimes names are spelled incorrectly, they are incomplete or illegible if handwritten. If there are multiple family members with similar names (such Sr., Jr. and III), but the beneficiary designation form may not be specific. People change their names over time through marriage or divorce. Sometimes the wrong legal name is used. You would be amazed to see how many parents do not know what legal name their daughters use after getting married.

If the names are wrong, incomplete, uncertain, misspelled, there will be delays in payouts, confusion, a lot of hassle, and it can even result in litigation or having your estate pass to the wrong person.

Issues with Your Beneficiaries

Not all beneficiaries are the same. Some should not or cannot receive an inheritance outright or all at once. If your beneficiaries are minors, individuals with specials needs, or individuals with an inability to manage assets or with creditor issues. When assets are payable to a beneficiary with these special circumstances, a court-appointed person (known as a conservator or guardian) will have to claim and manage the money until the minor turns 18 or perhaps for life if there is a disability.

Guardianships are expensive, intrusive and something you just want to avoid at all costs. They require attorneys, court appearances, legal documentation and annual accountings to the court.

Moreover, a beneficiary with special needs who inherits under a beneficiary designation can lose valuable government benefits, because that inheritance will make them ineligible to receive those important benefits. They may be forced to place inherited funds in pooled trusts or trusts that ultimately benefit the state.

If your beneficiary has any legal matters pending, such as divorce or any judgments or liens filed against them, their inheritance will be subject to those proceedings. Or if they are simply bad at managing their money, they can lose their inheritance through mismanagement or debts.

It is much better to use a trust if any of these special circumstances exist.

Outdated Beneficiary Designations.

Hands down the most common mistake we see is outdated beneficiary designations. As life goes on who you want to inherit your property will likely change. We have seen countless instances of ex-spouses being named or the youngest child being left off the form. When you do make changes, you must verify that change has been properly noted with the financial institution. I have personally updated a beneficiary designation on a life insurance policy online only to be surprised when I received my annual statement months later that my old beneficiaries were still listed on the account.

Failure to Review Designations with Professionals.

A beneficiary designation is a power document. What is written on your beneficiary designation form trumps your will and trust. If you get it wrong, it can be a very costly mistake that no one can fix after you pass away. It is very important to have an attorney review your beneficiary designations. Moreover, after you complete the form, confirm with your financial institution that the designation will be interpreted by them as you intend. Each financial institution has its own rules of interpretation. For example, some will let you designate what happens to each beneficiary’s share of the account if that beneficiary predeceases you. Some do not allow you to be that specific in your designations. You should treat the process of completing a beneficiary designation form as carefully as the drawing and completion of your will

If you have any questions about your beneficiary designations or any estate planning matter, book a consultation with an attorney at Robbins Law Firm today!

Call 704-892-4098 or email us at info@robbinslawfirm.com.

We look forward to hearing from you!