5 mistakes to avoid when naming beneficiaries

Editor’s note: This is the second column in a three-part series.

If you’ve ever spent time developing your estate plan, you know how important it is to select and update your beneficiaries. Failure to do so can lead to costly mistakes – for you and your loved ones.

Here are five common mistakes that can easily be avoided with a little proactive planning:

Mistake #1: Not Designating a Beneficiary on All Accounts

Make sure you have beneficiary designations on all your retirement, investment, and bank accounts, as well as on your insurance policies.

If you don’t name a beneficiary for one or more accounts, your estate becomes the beneficiary of that account and your loved ones will have to go through the probate process (a legal process that most families want to avoid for financial and emotional reasons) .

If this happens, your loved one may lose their ability to use “stretched” payments based on their life expectancy, as the advantageous tax status for retirement assets is lost.

Mistake #2: Forgetting to Name a Contingent Beneficiary on All Accounts

Many people list the same loved one – usually a partner or relative – as the primary beneficiary on most or all accounts. If this is how you have managed your assets, it is important that you also name a contingent beneficiary.

Indeed, if your primary beneficiary dies first and no contingent beneficiary is listed, this is equivalent to having no beneficiary designation. If you both die at the same time, the funds go towards probate.

Designating contingent beneficiaries also gives the primary beneficiary the ability to execute a qualified disclaimer so that certain assets can be passed on to subsequent relatives.

For example, a primary beneficiary may not wish to claim the assets due to tax implications or because they do not need them and prefer to pass your gift on to another beneficiary instead.

Mistake #3: Not using specific names

One mistake many people make is listing a generic term – like kids, parents, or aunts – instead of specific names in their beneficiary selections.

This can be problematic, especially if you are part of a blended family. Many states do not include or recognize stepchildren when the word “children” is listed.

Another risk of inaccuracy is that a family member with whom you have lost contact could come into the picture and try to claim some of your remaining assets. With that in mind, be sure to use each person’s full names when naming beneficiaries.

Mistake #4: Not regularly reviewing your beneficiary selections

Beneficiary designations take precedence over your will, so it’s crucial to keep them up to date.

You may need to update your choices every few years due to life changes, such as beneficiaries passing away or your relationship with them changing. This is particularly applicable if you have been through a divorce or remarried.

If your ex-spouse inadvertently remains the designated beneficiary of an account, they could have the upper hand if the matter ends up in court.

Mistake #5: Not Communicating Your Preferences to Your Partner and Family

Communicating your inheritance wishes is an important step in helping your loved ones know what to expect when you pass away. Although it can be difficult to strike up a conversation, it can help reassure your loved ones that you have a plan.

Keep in mind that you don’t need to share the exact amount you plan to pass on to your respective family members unless that’s your preference. Instead, share high-level details that give your family insight into how you intend to share your hard-earned wealth.

Estate planning isn’t the most enjoyable part of planning for your financial future, but it’s essential for ensuring that your assets are managed the way you want them to be after you no longer have control of them.

Beneficiary designations can be complex and, depending on your situation, it can be difficult to decide who to designate as the beneficiary of the assets. If you want a second opinion or help evaluating the implications of your options, consult an estate planner and financial advisor in your area.

Part 3 of the series on estate planning will cover: Does a trust fit into your estate plan?

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