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  • Writer's pictureMargot G. Birke

Beneficiary Designations - Avoid the Pitfalls

You have created your estate plan, which most likely includes a will and maybe a trust, distributing your assets according to your wishes. You are finished, right? Not exactly.

One detail that can often be overlooked in creating an estate plan is reviewing and update beneficiaries you have designated on a wide range of financial products. Beneficiary designations are beneficial because when the account owner dies, the assets go directly to the beneficiaries named on the account, bypassing the long and sometimes costly process of probate.

However, there are some beneficiary designation pitfalls to be aware of.

  1. Assuming your will trumps the policy. Retirement and life insurance policies are contracts. Regardless of what your will says, the retirement benefit and life insurance money will be paid to the beneficiary listed on the policy.

  2. Making an individual ineligible for government benefits. It is important to remember when naming a beneficiary to not name a disabled individual, whether a child or an adult, who may be receiving government assistance and could be at risk for losing those benefits that may have an asset limit.

  3. Naming a minor child. Financial institutions will not pay an inheritance proceed directly to a minor. Therefore, if you haven’t created a trust or made legal arrangements for someone to manage the money, a court may need to appoint a conservator to handle the proceeds which can be cumbersome and expensive. You may consider leaving the money to a trust for the minor’s benefit or name an adult custodian.

  4. Naming only a primary beneficiary. While most people logically name their spouse as the first beneficiary it is important to provide succession in case the first beneficiary named precedes you or something happens to both spouses at the same time. When there is no living beneficiary, the asset typically foes into the decedent’s estate and is subject to probate, which can lead to complications.

In conclusion, designating beneficiaries is not something you should set and then forget. You need to review your policies and accounts every three to five years and after major life events, such as marriage, having children, or divorce, and modify the beneficiaries when circumstances change.

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