Blog Post
7 common beneficiary designation mistakes to avoid
December 21, 2020 / Category: Uncategorized
It’s the holiday season and maybe a most unconventional one for many of us, but don’t let that stop you from enjoying it! Although you may have to incorporate social distancing into your plans, you can still keep your loved ones close. Ensure some future security for them in the form of beneficiary designations — here are some common mistakes to avoid in the process.
Fraxedas Law is here to help you with any of your estate planning needs, and we can do so via video chat and our remote services. Connect with us to learn more. We are here for you and your family. Info@FraxedasLaw.com 561.288.9788
Designating beneficiaries for your financial accounts is important. Doing so outlines how and to whom you want your assets distributed upon your death. And since it’s your responsibility to name your beneficiaries, doing it incorrectly (or not at all) can be costly.
Here are 7 common mistakes to avoid when making beneficiary designations.
Not accounting for all your assets
Before you start determining what and how much you want to go to your beneficiaries, you’ll need a list of all the assets that make up your estate. Be sure to include the following:
- Traditional and Roth IRAs
- 401(k),403(b) and other retirement accounts
- Life insurance policies (including those provided by your employer)
- Bank and brokerage accounts
- 529 education plans
- Investment and mutual fund accounts
- Real estate, including your home and any investment properties
- Business interests
- Personal property
Not having a plan
Once you have a comprehensive list of your assets, do you know where you want them to go after you pass? The answer might be to your spouse, your children or grandchildren, your go-to charities or a combination of the above.
You’ll also want to consider whether you’d like to provide for outright distributions to the beneficiaries or, for larger inheritances, leave funds in a trust to provide for access to the assets over time.
A trust can give you more control over how your assets are distributed. You can name a trust as a direct beneficiary of an account. Upon your death, your assets transfer to the trust and distributions are made from the trust to its beneficiaries according to your wishes.
Confusing designations and wills
Many people might think a will is a primary way of determining how someone’s assets are passed on. However, for certain assets that can be transferred using a beneficiary designation, that designation will decide who receives that asset upon your death regardless of what is stated in your will.
Missing a beneficiary
Failing to designate a beneficiary can be a costly mistake. Consider your retirement account: if you haven’t named a beneficiary, the account could get passed to your estate. If this happens, your heirs could be required to take distributions, which would be taxable to the recipient.
However, if you’ve named your spouse as the beneficiary, they would have the option to rollover funds in a way that defers or minimizes taxes. If you’re charitably inclined, naming a charity as a beneficiary of a retirement plan can also be a good tax-saving strategy.
Even if you’ve chosen a primary beneficiary for your main accounts, you may want to consider adding a secondary beneficiary in case the primary is not available or declines the inheritance.
Not reviewing and updating designations
With estate planning, it can be tempting to “set it and forget it.” But different life events might call for a review of your beneficiaries, such as becoming a grandparent or getting a divorce.
For example, if one of your beneficiaries dies before you and the designation is never updated, your assets might become part of your estate and may have to go through the legal process called probate. The probate process may mean extra time and additional costs which could have easily been avoided with an updated beneficiary designation.
Some plans may automatically name your spouse or child as a beneficiary, but you should not rely on any default provisions in your plan. Make sure your designations are current and accurately reflect your wishes, and recheck them annually. Financial institutions and plan administrators are not responsible for your beneficiary designations.
Not keeping track of your accounts and documents
Your plan can be affected by external factors, too. Major changes at the institution administering your retirement accounts or insurance policies – such as a merger or migration to a new system – could affect your designations.
Request copies of your plan documents and periodically verify that the documents have matching information and are up to date.
Ignoring the financial impact on beneficiaries
The ability of a beneficiary to handle an influx of money should also be a consideration. Receiving an inheritance can occasionally have a negative impact on a beneficiary’s finances.
For example, naming a young adult child who is not prepared to manage a windfall might result in some unwise short-term decisions and reduce the lifespan of the inheritance.
Choosing and reviewing your beneficiary designations should be a part of your estate planning. Whether you leverage a trust or other estate planning strategies, work with a financial professional to make sure your priorities are being met in an effective way for you and your beneficiaries.
Robert Fraxedas is an accomplished attorney with 15 years of legal experience, focusing on estate planning, probate, elder law, and business planning. In 2002, Mr. Fraxedas graduated cum laude from the University of Florida with a bachelor’s degree in philosophy. There he was a National Merit Scholar and a member of the esteemed Phi Beta Kappa Honor Society. In 2005, Mr. Fraxedas graduated from the University of Florida’s Levin College of Law. After practicing for 10 years, Mr. Fraxedas obtained his LL.M. Degree in Estate Planning from the University of Miami School of Law, graduating cum laude.
Mr. Fraxedas is an experienced, knowledgeable, and hardworking attorney who cares deeply about his clients. He will get to know you, your family, and your goals and develop a personalized plan that is tailored to meet your needs. Whether it’s a simple will, complicated probate, crafting a trust for your children, or obtaining Medicaid or other government benefits, Mr. Fraxedas is committed to taking care of you and your family as if it were his own.
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