Beneficiary Designations: How to Avoid Common Mistakes
Every so often, we hear about a celebrity who has died without an estate plan. Surviving relatives wait in the wind while the decedent’s financial affairs go through the settlement process. Uncertainty surrounding the celeb’s riches and ultimate wishes lead to disputes that can last for years, with attorney’s fees piling up.
Ahh, celebrities — they’re just like us. They live their lives, get divorces, have children and stepchildren, start new projects, and may either forget to update their estate plans or never think of creating one in the first place. This doesn’t have to be your story, however! Start by knowing when – and how – to update your beneficiary designations with these simple steps:
Step 1: Know which accounts allow you to designate a beneficiary. Beneficiary designations allow certain assets to pass to your loved ones and other intended heirs at your death without the need for probate. The most common asset types in which beneficiaries may be designated include life insurance policies, annuities, and retirement accounts – like your 401(k), 403(b), or IRA. But those accounts aren’t all: In many cases you can add “Transfer on Death” (TOD) instructions to investment accounts and can also add “Payable on Death” (POD) instructions to everyday checking and savings accounts. TOD and POD instructions work the same way as beneficiary designations do in that you will be able to have the money in those accounts transfer immediately to your named beneficiaries when you die.
Step 2: Provide clarity! If you come from a family in which you have a John Smith, Sr., a John Smith, Jr., a John Smith III, or similar, don’t forget to be clear about which John Smith you intend to name as your beneficiary. Make sure you have the person’s correct legal name, and double-check it each time you review your beneficiaries, because they may marry, divorce, or even decide to change their legal name. In addition, some beneficiary forms allow you to include other identifying information such as Social Security numbers. Providing maximum clarity will allow your beneficiaries to work through the claims process as smoothly as possible when the time comes.
Step 3: Review your accounts annually, or whenever something in your life changes. Reportedly, singer Barry White, who died at the age of 58 with nine children, two ex-wives, and a long-term partner, failed to update his estate plan, which caused a major dispute as to who should inherit his estate. While it’s also important to regularly update your will and trust documents, accounts that enable you to designate beneficiaries supersede what’s in your will or trust. Accounts with named beneficiaries are paid directly to the named beneficiaries, regardless of what your will or trust says. That’s why it’s important to review and update your beneficiaries regularly.
Step 4: Understand the ramifications of your beneficiary decisions. Keep in mind that standard beneficiary forms generally provide no asset protection planning for the named beneficiaries. If you have concerns regarding a beneficiary’s ability to manage their inheritance, you may want to consider establishing a trust for the beneficiary under your estate plan and name the trust as the beneficiary of your accounts. You can design the parameters of the trust to provide controlled management of the trust assets until the beneficiary attains an age of financial maturity in the future and can manage larger sums of money on their own. Trusts are also appropriate for beneficiaries with special needs who may be receiving government benefits related to a disability.
Get Help from a Trusted Advisor
Whether or not you consider yourself to be wealthy, having an estate plan and up-to-date beneficiary designations can help increase your peace of mind – and that of your heirs after your death. Estate planning can be quite complex and laws vary by state, so it’s best to consult your advisor or a trusted estate planning attorney as you develop your plan.
Dominick J. Parillo
Director of Wealth Transfer