What Can Go Wrong – Naming a Beneficiary

You are probably aware that you should designate beneficiaries to your belongings should you die. Often it seems fairly easy to do, but there can be some interesting unintended results depending on who you designate and what they do after you die

Here are some ways you can mess it up when making beneficiary designations.

You inadvertently override your will or trust.

Lets say you want all of your assets to go to your children. But, you set up the beneficiary on your IRA before that divorce and made your then-spouse the IRA beneficiary. You might think you are covered, since you named your children as beneficiaries of your estate, but in reality, individual account beneficiary designations will rule. The IRA goes to the ex-spouse. All of your estate planning needs to head in the same direction and should be reviewed in whole to insure that the distributions you intend to make are actually clear in the documents.

You assume your child will be of legal age when you die.

What if you die in a car wreck before your child is of legal age to inherit. Their guardian will have control of the money they are to inherit. If you haven’t set up a will and designated a guardian, the courts might appoint a stranger as his/her guardian and your money might not get spent on that minor beneficiary. Alternately, the money might be tied up until the child is 18.

You forget to change a beneficiary when your life changes.

This happens more often than you think. Perhaps you are a young single professional and landed a job with great retirement benefits. Being the smart person you are, you you sign up for a 401K with company matching and do the right thing by starting to pump as much into it as possible. Since you are single, you make your Mom and Dad or your brother or sister your beneficiary.

In 5 years – you’ve married and had a baby, but your 401k still goes to Mom and Dad when you die. You’ve been too busy with that career and new baby to think about mundane paperwork. Often, financial institutions do not notify you regularly as to what beneficiaries you have set up.

You make your estate your beneficiary.

If you do this, the estate will most likely have to go through probate court, – which can take months or sometimes longer. Meanwhile, your beneficiary receives nothing from the estate. In addition, in certain circumstances, especially on IRA’s, your estate has far fewer options than a real person or trust on your death about how the money is taken out – typically the deadline for withdrawal is accelerated if your estate inherits your IRA.

Your estate’s assets may also be subject to creditors whereas other choices provide protection from your creditors.

What can go wrong after you die.

Spouse contests the distributions.

In most states spouses are entitled by law to certain portions of the deceased spouses’ estates.

If you left a large part of your estate to someone other than your spouse your spouse may contest your designations and often might win.

The surviving spouse may decide to contest the estate plan that doesn’t provide for them

Grandchildren inherit but can’t get use of the money.

Maybe you left a chuck of money to your ‘surviving grandchildren’ and they are not yet 18. Moms and Dads may be forced to go to court to get a document making them guardians of their own children so they can mange the money you left to their children.

If you leave money to a minor child, their guardian may spend their money for things on which you wouldn’t have wanted it spent.

Young adults inherit and blow the money.

If you solved leaving money to minors by opening a guardianship account (such as one under the Uniform Gifts to Minors), the kid gets their money the very day they are of legal age, ready or not.

Getting large sums of money at age 18 or 21 can totally derail your beneficiary from discovering their life path as well as allowing them to blow the money and any chance at learning good money management skills they may have had.

They money gets lost.

If you haven’t shared your estate plans with any of your beneficiaries, they may not know to claim the assets.

If you have a life insurance policy squirreled away, or a 401K from an old job no one knows about, the beneficiary will not know to submit a claim and the monies will not be paid.

Tell your adult beneficiaries they are set to receive something from what ever asset you are leaving them. Let your executor or trustee know about all policies and accounts so they can follow up with each institution to see what beneficiaries are on file.

Beneficiaries die before you.

Most estate plans will handle a situation where one of several beneficiaries die, but if all of them die before you do and you don’t update your estate plans, your asset will likely go into your estate. Be sure and specify a final landing point if all beneficiaries pre-decease you.

Plans to have beneficiaries ‘defer’ assets to the second in line may go awry.

A beneficiary doesn’t have to accept an inheritance. Although most will want it, some might take action to defer acceptance. When they do, the next in line beneficiary gets their chance at it.

This can be a valid estate planning technique. If, for instance you have a Roth IRA and really want it to be a stretch IRA (meaning that your descendants will leave the money inside the IRA as long as possible to stretch out the tax free earnings), the IRA should be left directly to the youngest beneficiary. This will probably be your grandchildren, yet, you want to make sure your spouse has enough to last their lifetime, so you designate your spouse as primary, your adult children as secondary and your grandchildren as tertiary beneficiaries. After you die, your spouse either doesn’t know to, doesn’t want to or doesn’t take action in time, to defer the Roth so that it goes to the children, and the parents just decide to hang onto it.

No one likes to think about these things, but look what can happen if you don’t or if you don’t get it right? Set up your beneficiaries – get help from an estate planner, get a will naming guardianship of your children, check your designations as part of your yearly finance review.

Have you seen the results of any messed up beneficiary designations?

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