Sure—it’s something we don’t like to think about, but it’s never too early to begin planning your estate. An estate plan is one of the most important things you can do to ensure that those you leave behind aren’t left with difficulties and disputes when it comes to your assets. Even more, naming your beneficiaries—those you have chosen to inherit your assets—is an essential part of the estate planning process.
Since many people have questions and need guidance in the estate planning process, our team wanted to highlight a few of the common mistakes we see when naming beneficiaries. Our goal is to help you avoid consequential tax issues for your beneficiaries and estate, so here are a few things you should not do when naming beneficiaries.
Avoiding to Name Beneficiaries
This may seem obvious, but believe it or not, many people never even name a beneficiary for their life insurance or retirement savings. Whether they don’t realize they should or just never get around to doing it, not naming a beneficiary can leave one’s assets to his or her estate, which can end up in a lengthy probate court process that could ultimately leave assets in the wrong hands.
Naming Your Estate as Your Beneficiary
Specifically for your retirement accounts, naming your estate as beneficiary will cause your distributions to go through probate, which can be more limiting than directly naming a spouse or non-spousal beneficiary. If an estate is named as the beneficiary, distributions would either be granted as a taxable lump sum at that time or within five years of the date of death with taxes applied at the time of distribution.
Forgetting to Update or List Contingent Beneficiaries
You’ve heard it said before—consistency is key. This is especially true when naming beneficiaries. In the case that your beneficiary dies first but you haven’t named a contingent beneficiary, you’re back to having no beneficiary. Even worse, if you and your spouse happen to be involved in a tragic accident and die simultaneously having not named beneficiaries, your estates go to—you guessed it—probate. And, as mentioned above, you know the lengthy and exhausting process that can be to your loved ones. All in all, our life circumstances will likely change over time, and so may our beneficiaries. Thus, updating this important information along the way as needed is crucial.
Ignoring Special Circumstances
Whether it’s a minor, a special needs relative, or loved ones who may not have the proven ability or maturity to handle assets, there are a variety of special circumstances that should be taken into account when naming your beneficiaries. In the case of minor beneficiaries, they would not receive life insurance policy or other account distributions until the age of majority in your state (18 or 21). A beneficiary with special needs could even end up being disqualified from receiving government benefits in certain cases. So, a trust is likely a better option to make sure they properly receive a portion of your estate.
Leaving Out Specifics
Being specific is always a good thing, and especially when naming beneficiaries. Believe it or not, we’ve seen individuals name “my kids” as beneficiaries, which can lead to many problems depending on the state of residence. Even more, it’s not uncommon to see parents designate separate children as beneficiaries for each of their various accounts. As you can imagine, this can lead to a myriad of problems, such as one child being left with much more than another, just to name a few.
Failure to Review Designations with Legal and Financial Advisors
The process of estate planning, much less naming beneficiaries can be cumbersome and intimidating if you’re attempting to tackle it on your own. From the initial paperwork to processing the long-term objectives, make sure you enlist the help of professionals—both financial and legal. Not only can financial and legal advisors help you understand all the complicated jargon, but they’ll look out for your best interests—and, ultimately, the best interests of your beneficiaries.
Need Guidance When Naming Beneficiaries?
Carefully selecting your beneficiaries and then occasionally reviewing your choices will help you stay in control of your money, which is the ultimate goal of estate planning. Recognized among the nations’ top wealth advisors, our advisors at the Dobyns Wealth Team can guide you toward financial solutions that can positively impact your quality of life. Contact us today to get started!
