If you have a 401K, an IRA or a life insurance policy, you’ve named a beneficiary on a beneficiary designation form. These forms matter as they control who receives some of your most valuable assets regardless of your current family makeup or the intent expressed in your Will or Trust. To ensure your valuable assets best benefit your loved ones, you’ll want to avoid the common mistakes listed here:
Life changes quickly and before you know it outdated beneficiary designation forms fail to consider a spouse or child, or could pass assets to someone too irresponsible to manage an inheritance. It is wise to review your beneficiary designations every few years or after any significant life event (marriage, divorce or the birth of a child or death of a loved one, for example). A regular review allows you to decide whether a different distribution of your assets makes sense and also uncovers the rare, but possible, loss of a beneficiary designation form by the company in control of your financial asset.
Mistake – Not Naming a Contingent Beneficiary
If your primary beneficiary predeceases you and you haven’t named a contingent beneficiary, the probate court will likely have to determine who should receive the benefits in accordance with your Will or Trust or your state’s default inheritance plan. Naming a contingent beneficiary prevents the unnecessary costs, delay and stress of probate and ensures you control who receives your assets. It also gives your primary beneficiary the flexibility to refuse or “disclaim” an unneeded inheritance if it’s a smart tax move to instead let it pass to a child or other named contingent beneficiary.
Mistake – Naming Your Estate as Beneficiary
Naming your estate as beneficiary doesn’t mean your executor of your Will or trustee of your Trust has immediate control to distribute your assets to your beneficiaries. Instead, your loved ones will need to initiate the probate process to determine who should receive the inheritance in accordance with your Will or Trust or your state’s default inheritance plan if you haven’t prepared either estate document. You can avoid the unnecessary costs, delay and stress of probate and ensure you control who receives your assets by naming the appropriate beneficiaries with help from your estate attorney.
Naming a Minor Child as Beneficiary
While no one may stop you from naming a minor on a beneficiary designation form, the financial institution cannot pay benefits directly to a minor, which means a custodian or conservator will need to be appointed by the court to manage the inheritance until the beneficiary reaches age 18 or 21, depending on state law. To avoid these unnecessary legal and administrative expenses ask your estate attorney whether you should establish a trust for the minor’s benefit or designate that the minor to benefit subject to your state’s Uniform Transfers to Minors Act (or the older Uniform Gifts to Minors Act for South Carolina residents).
Mistake – Naming One Child Expecting that Child to Share the Inheritance
Often one child is more financially responsible than others, but a child may face negative income or gift tax consequences in making a gift of the inheritance to others and is under no legal obligation to share the benefits. Ask your attorney how to appropriately name your children as co-beneficiaries, or to create a Trust to benefit any child that is not financially able to manage an inheritance, or designate a minor inherit subject to your state’s Uniform Transfers to Minors Act (or the older Uniform Gifts to Minors Act for South Carolina residents).
Mistake – Naming Young or Financially Irresponsible Beneficiaries
If naming a beneficiary to receive assets outright is unwise, your attorney can create a Trust specifically designed to manage the assets for the beneficiary and put some limits on how the assets will be used (e.g., provide for health, education and support with outright control at a certain age where advisable). Just avoid naming an existing trust as beneficiary without getting advice from your attorney to be sure the terms of the Trust make sense today and that naming the Trust as beneficiary won’t have unintended tax consequences, as described in the next paragraph.
Mistake – Naming a Trust Beneficiary without Specific Instructions from your Estate Attorney
Before naming an existing Trust as beneficiary on any beneficiary designation form, ensure the terms of the Trust make sense for that beneficiary and that doing so won’t have unintended tax consequences. IRAs, 401Ks and other qualified retirement plans allow for the valuable tax-deferred growth of the asset over a beneficiary’s life expectancy, however, most Trusts are not drafted to allow for continued tax-deferral. That means naming a Trust as beneficiary typically causes all the retirement plan assets to become income taxable within five years. If you want a Trust to control how your retirement assets are received by minor beneficiaries or beneficiaries needing some management or distribution assistance, ask your attorney for a designated beneficiary Trust to accomplish these goals without negative tax consequences.
Mistake – Naming a Beneficiary with Special Needs
It is common to name someone with special needs as a beneficiary on a beneficiary designation form without realizing that doing so may disqualify the individual from receiving governmental assistance such as Supplemental Security Income (SSI) or medical benefits. Be sure to speak with your attorney to determine whether it’s wise to name a special needs Trust as beneficiary to allow benefits to pass to your loved one without jeopardizing his or her access to governmental benefits.
Mistake – Naming Anyone other than Your Spouse as a Retirement Plan Primary Beneficiary
Federal and state law place restrictions on a married individual from naming someone other than his or her spouse as the primary beneficiary. While it may be possible for your spouse to consent to your naming of another, state laws also come into play so be sure to seek guidance from an attorney.
Important Disclosure: This has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sources. Beacon Pointe does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.