When you’re naming beneficiaries — in your will, in a trust, or on an investment account — you’re making a plan for the future. You’re taking a step to ease the burden on your loved ones and to create peace of mind for yourself. You want to know that your assets are helping the people you love.
So you never want to make a beneficiary designation that actually makes things harder or creates unintended consequences for your family. Unfortunately, there are a few common mistakes that people make every day.
Don’t make these mistakes when you’re naming beneficiaries:
Failing to name beneficiaries on accounts
Of course, the biggest mistake you can make when naming beneficiaries is to not name them. Many accounts require you to name a beneficiary to open the account — like 401K accounts or insurance policies.
But those aren’t the only accounts you can name beneficiaries on. You don’t have to name a beneficiary for your checking account, but doing so could streamline the transfer of assets after your death.
To name a beneficiary to your checking account, you’ll contact your bank and ask them to convert your account into a payable-on-death (POD) account. They’ll give you a beneficiary designation form. It’s called a Totten Trust, and when you fill it out, you’re giving the bank authorization to automatically transfer the funds in your bank account to the named beneficiary when you die.
The benefit of a POD account is that those funds don’t have to go through probate. They flow directly to the beneficiary.
While you could create the same result by naming a joint account holder — like one of your adult children — that plan has one big potential negative. The account would flow directly to your joint account holder after your death, but they also have full access to the funds now. You may want a joint account holder so that you can share funds (for instance, a spouse), it’s not the best solution if you’re focused solely on the estate planning benefits.
Whenever you’re naming beneficiaries, you should be as specific as possible. For instance, rather than saying that you want your assets to pass to “my children,” make sure to name each child individually.
Why? Often people make wills that aren’t implemented until years (perhaps even decades) later. What seemed very clear when they created the will may not be so obvious when an executor is attempting to administer it down the road.
For instance, let’s say Mary created a will after her divorce. She named her children (“my children”) as her beneficiaries. At the time, she had two young daughters in middle school. Later, she remarried and helped raise her husband’s son. She never revisited her original will, and she and her husband never did any estate planning together. Mary believed that if anything ever happened to her, her will would ensure that her daughters and her step-son would divide her estate equally.
Unfortunately, when Mary dies many years later, her daughters and her step-son are no longer on speaking terms. In most states, unless a parent legally adopted a step-child, they aren’t considered the parent’s child for purposes of inheritance. Because of that, Mary’s step-son doesn’t receive any of her estate.
Failing to name contingent beneficiaries
Most people aren’t updating their will or beneficiary designations on various accounts on a monthly — or even yearly — basis. That means when the beneficiary designations come into play, something might have changed.
The beneficiary may have died or become unavailable to receive their inheritance directly (for instance, because of incapacitation). If the person named as beneficiary can’t receive the inheritance, the funds flow into the estate and likely have to go through probate.
If you name a contingent beneficiary on a retirement account or an insurance policy, you can rest easy that the funds in the account will flow directly to an heir rather than getting hung up in the probate process.
Designating a beneficiary who can’t inherit
If you have children, your natural inclination may be to name them as beneficiaries in your will and on all your accounts. It makes sense to provide for your children, but minors can’t legally inherit.
So what do you do if you want your children to pass along your estate to your children, but they’re not old enough to inherit?
You have a few options. You can:
- Name a property guardian in your will. This person will be in charge of managing any assets that a minor child receives during the probate process.
- Name a custodian in your will. You can also name a custodian in your will to manage assets provided to a minor child. Georgia follows the UTMA (the Uniform Transfers to Minors Act) and sets the age of majority at 21. Naming a custodian requires a bit more specificity than a property guardian — you’ll state the amount or specific asset you’re leaving to the custodian “as custodian for” your minor child.
- Set up a trust (or trusts). With a living trust, you can appoint a trustee who will manage the assets on behalf of the beneficiaries. You can create separate trusts for each of your children or a shared trust — sometimes called a “pot trust” — for all your children. A pot trust gives the trustee discretion over how to spend the money on behalf of the children. The simplest trust to set up is a testamentary trust, which is a provision of a will that appoints a trustee to act on behalf of a minor beneficiary.
Not updating beneficiaries
Just like failing to name a contingent beneficiary can create problems down the line, not updating beneficiaries might lead to unintended consequences.
You may end up with beneficiary designations for beneficiaries that have died or designations for beneficiaries that you’d no longer prefer. To avoid this, set a reminder in your calendar to check your beneficiary designations once a year. At a minimum, make sure you revisit your beneficiary designations whenever you have big life changes like a marriage or divorce.
Naming different children for different accounts
You can certainly choose to name your daughter as the beneficiary on your life insurance policy and your son as the beneficiary to your investment account. However, if you want them to inherit equally, that’s not the best strategy.
While the accounts may have similar values at the time you make the designation, the values could change over time in ways you don’t anticipate or monitor. If you are concerned with equal distribution of assets to children, a better plan is to name all your children on all accounts where you provide beneficiary designations.
Estate planning has the potential to provide peace of mind for you and support to your family in the future — if your wishes are able to be carried out as you intended. The best thing you can do is hire an estate planning attorney to ensure that your plan is designed in the best way for you and your family. Schedule a consultation with Sarah Siedentopf to make sure you’re avoiding any costly estate planning mistakes.
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