When Selecting Beneficiaries Gets Overlooked

Here’s one way to mess up your estate plan: naming beneficiaries not by name, but by the generic term “children.” If yours is a blended family, your stepchildren may be out of luck, according to the article “Five mistakes to avoid when naming beneficiaries” from Delco Times. In many states, stepchildren aren’t recognized if the word “children” is used. Use their full names.

Here are more mistakes that people make about beneficiaries:

Failing to name a beneficiary on every account. The great thing about beneficiary designations as that they do not go through probate and beneficiaries receive assets directly from the custodian of the account. However, if you fail to name a beneficiary, the asset, whether they are life insurance proceeds or the entire balance of a 401(k) account, will go to your estate. If it exceeds the statutory limit, then it will need to go through probate.  For retirement accounts, your heirs will also lose the ability to stretch withdrawals over their lifetime.

Failing to name a contingent beneficiary. What if the first person passes away before you do and there’s no contingency beneficiary named? The asset will be treated as if there were no beneficiaries named at all, and it goes through probate.  If both the sole beneficiary and the owner die at the same time, all of the funds must similarly go through probate.

Neglecting to review beneficiary selections on a regular basis. Beneficiary designations override a will, so it’s very important to keep them current. Every few years, review the accounts that you own and see what your beneficiary designation choices are. This is especially necessary if you have been divorced, widowed or remarried. If you fail to take your ex-spouse off an insurance policy, for instance, there’s little that can be done when you die—even if you put your wishes that a new spouse or children receive the proceeds in your will. This will likely cause the issue to go to court, which will soak up precious time, resources, and anxiety.

Not communicating with your partner and family members. Talking with family members and loved ones about your wishes for your legacy and asset distribution is an important way to let them know what to expect when you die. It’s not an easy conversation, but it will be helpful to all. Knowing you have a plan will alleviate them from the worry of the unknown, and it prevents unexpected surprises. There’s no need to talk specific dollar amounts unless you want to. Instead, give them a high-level overview of what your intentions are.

Some families find these conversations easier in the presence of an objective third party, like your estate planning attorney. If your estate plan includes trusts or any complex planning strategies, a family meeting provides a means of explaining the plan and the processes involved.

Reference: Delco Times (October 6, 2019) “Five mistakes to avoid when naming beneficiaries”