Your Beneficiary Designation Do’s and Don’ts

What is the first mistake many people make with their will? Failure to understand that it doesn’t control who inherits all of their assets when they have passed. Beneficiary designation automatically directs some assets. That only happens through the completion of a form with the company holding the asset(s), and naming who will inherit the asset upon your death.

What then passes by beneficiary designation? Assets including life insurance, annuities and retirement accounts (think 401(k)s, IRAs, 403bs and similar accounts do. Many financial companies will also let you name beneficiaries on non-retirement accounts, such as savings or checking accounts. This is known as TOD (transfer on death) or POD (pay on death) accounts.

This is a good way to make certain a named beneficiary will get assets directly. If not properly completed, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company. Because mistakes can be costly, avoid these critical mistakes when dealing with your beneficiary designations:

  • Forgetting to name a beneficiary. Many people fail to do this one! If you don’t name a beneficiary for life insurance or retirement accounts, the financial company has its own set of rules about where assets go after you die. Proceeds of life insurance will usually be paid to your estate. If you’re married, your spouse will most likely get your retirement benefits. The retirement account will likely be paid to your estate, if you’re single, which has negative tax consequences. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This accelerates the deferred income tax, which must be paid earlier than would have otherwise been required.
  • Failing to think about special circumstances. Think about the individuals to whom you’re considering giving your assets. Not everyone should receive them directly. There are people with special needs, or minors, or people who can’t responsibly handle assets or who have creditor issues. Minor children can’t legally claim the assets, because they aren’t legally competent. In such cases, a court-appointed conservator will claim and manage the money until the minor turns 18. For those with special needs, they could risk losing government benefits by receiving assets directly. Once they receive the inheritance directly, they may likely own too many assets to continue qualifying for government assistance. People with financial issues and creditor problems can lose the asset through mismanagement or debts. Ask our attorneys at Morneau Law about creating a trust to be named as the beneficiary.
  • Designating the wrong beneficiary. Unfortunately, it is not uncommon for an individual to complete designation forms incorrectly. In the case that a family has multiple people with similar names, it is imperative that the form specifically designate the individual by providing additional details such as date of birth and social security number. If a person has changed his or her name due to marriage or divorce, or if an asset owner has assumed a different legal name, the form must be updated. If not corrected, these mistakes can cause delays in payouts. In the case that two people have similar names, it could result in litigation.

Take the time to carefully and correctly choose your executor and beneficiaries. Beneficiary designations are created to guarantee you make the final decision on who will get your assets when you’re deceased. Review those choices periodically and make the necessary changes to stay in control of your money.

Morneau Law has a team of experienced attorneys, who specialize in creating personalized estate plans. Call us at (603) 943-5647 to get started.