You’ve probably stumbled upon this article because you don’t want to make any mistakes when it comes to beneficiary designations. You’re asking what you think is a simple question: “who should I NOT” name as a beneficiary. But as you’ll learn below, there are many things to consider.
When you’re naming beneficiaries — in your Will, in a Trust, or on another policy or account (such as an investment account or life insurance policy) — you’re making a plan for the future. You’re taking a step to ease the burden on your loved ones. This creates peace of mind for you. You want to know that your assets are helping the people you love and going where you desire after your death.
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.
Read on to learn how to avoid common mistakes when you’re naming beneficiaries.
What is a Beneficiary?
First off, let’s make sure we understand what we’re talking about. What is a beneficiary anyways?
A beneficiary is an individual (or entity) named within a Will, Trust, insurance policy, or otherwise designated to receive monies, properties, or other assets owned by another. So, in your case, a beneficiary is a person or entity named in your Will, Trust, insurance policy, or other account that will receive your assets upon your death.
Mistake #1 – Failing to name beneficiaries on accounts
Of course, the biggest mistake you can make when naming beneficiaries is to not name them at all. Many accounts require you to name a beneficiary to open the account — like 401K accounts or insurance policies. When you open those accounts you know you need to name a beneficiary (or beneficiaries—you can name multiple entities and divide the assets as you wish). But what you may not realize is that while you aren’t required to name a beneficiary on other accounts, you can still do this.
For Instance, you don’t have to name a beneficiary for your checking account, but doing so could streamline the transfer of assets after your death. Naming a beneficiary to your checking account requires changing your account into a payable-on-death (POD) account. To do this all you need to do is contact your bank and ask them to convert your account into a POD account. They’ll give you a beneficiary designation form. This form is 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 upon your death.
You may be wondering why you couldn’t just create the same result by naming a joint account holder — like one of your adult children? That plan has one big potential negative. Yes, the account would flow directly to your joint account holder after your death, but they also have full access to the funds now. This could become a potentially sticky situation very quickly. There are definite instances where having a joint account makes everything easier. For example, so that you can share funds with your spouse. But this is not the best solution if you’re focused solely on the estate planning benefits. The POD option is best for estate planning purposes.
Mistake #2 – Being Vague when Naming a Beneficiary
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.
So, when you name your beneficiaries it’s important to list each person out by name. Never assume that the Courts or the laws understand or will implement your intent. Be clear with your intent.
Mistake #3 – 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. Which defeats the purpose of using beneficiary designations as a way to avoid 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.
It’s a good rule of thumb to revisit your beneficiary designations at least once a year to ensure that they are in alignment with your wishes and that each beneficiary is available to receive the asset should something happen to you.
Mistake #4 – 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 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 , 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.
Mistake #5 – Not updating beneficiary designations
As we hinted at above, just like failing to name a contingent beneficiary can create problems down the line, not updating beneficiary designations might lead to unintended consequences.
You may end up with beneficiary designations for beneficiaries that have died, become incapacitated, or you may have 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, birth of a child, death of a spouse or child, or divorce.
Updating your beneficiaries or looking at them regularly will give you peace of mind. In the event you need to make a change, it’s usually a simple process. In most cases, it’s as easy as completing a form online through your insurance company or bank’s website indicating how your wishes have changed.
Mistake #6 – 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 can 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.