Common Mistakes when Making Beneficiary Designations
Let’s say you divorce and remarry and forget to change your beneficiary from your ex-spouse. Your ex-spouse will be smiling all the way to the bank. There won’t be much that your new spouse could do, if you forgot to make that change before you die. Any time there is a life change, including happy events, like marriage, birth or adoption (or even sad events, like a divorce or death), your beneficiary designations need to be reviewed, says the article “One Beneficiary Mistake You Really Don’t Want to Make” from Kiplinger.
If there are new people in your life you would like to leave a bequest to, like grandchildren or a charitable organization you want to support as part of your legacy, your beneficiary designations will need to reflect those as well.
For people who are married, their spouse is usually the primary beneficiary; the sole beneficiary designation. Children are contingent beneficiaries who receive the proceeds upon death, if the primary beneficiary dies before or at the same time that you do. It is wise to notify any insurance company or retirement fund custodian about the death of a primary beneficiary, even if you have properly named contingent beneficiaries.
When there are multiple grandchildren, things can get a little complicated. Let’s say you’re married and have three adult children. The first beneficiary is your spouse, and your three children are contingent beneficiaries. Let’s say Sam has three children, Dolores has no children and James has two children, for a total of five grandchildren.
If both your spouse and James, die before you do, all of the proceeds would pass to your two surviving children, and James’ two children would effectively be disinherited. That’s probably not what you would want. However, there is a solution. You can specify that if one of your children dies before you and your spouse, their share goes to his or her children. This is a “per stirpes” distribution.
This way, each branch of the family will receive an equal share across generations. If this is what you want, you’ll need to request per stirpes, because equal distribution, or per capita, is the default designation. Not all insurance companies make this option available, so you’ll need to speak with your insurance broker to make sure this is set up properly for insurance or annuities.
Any assets that have a named designated beneficiary pursuant to the beneficiary designation are not controlled by your will. Consequently, when you are creating or reviewing your estate plan, create a list of all of your assets and the desired beneficiaries for them. Your estate planning attorney will help review all of your assets and means of distribution, so your wishes for your family are clear.
To ask Ted a question about a beneficiary designation, or if you want to avoid common mistakes when making beneficiary designations, feel free to BOOK A CALL today.
Check out these additional articles on estate planning: Should a Trust Be the Beneficiary of IRA? and Who Receives an Inherited IRA after the Beneficiary Passes? and Should I Name a Trust Beneficiary of a Roth IRA? and How Do I Align Retirement Planning with Planning for a Special Needs Child?
Reference: Kiplinger (March 23, 2021) “One Beneficiary Mistake You Really Don’t Want to Make”