Just about everybody owns an account or policy that requires a designated beneficiary. Such a designation allows you to choose who receives the funds upon your passing. Importantly, these assets then don’t go through the often-complex probate process.
While this all sounds quite simple, in reality, a lot can go wrong with a beneficiary designation. Here are five examples.
1. An outdated beneficiary
Life brings changes. A beneficiary designation should adjust with it.
Because a beneficiary designation supersedes relevant language in a will, it is important to have the correct individual listed. A retirement account or life insurance policy that has existed for a couple of decades may have a former spouse as beneficiary, for example, or a loved one who is no longer in a position to inherit such a gift.
An outdated beneficiary designation can easily result in funds being directed to an unintended recipient.
2. No beneficiary
An account without a listed beneficiary can also be problematic. Sometimes the policy includes a default in these situations, but this may result in a similar issue as described above.
However, in many cases the asset will simply go to your estate. This means the funds will go through probate, rather than passing to a surviving loved one in a streamlined manner. Your well-laid tax savings strategy will also likely be impacted.
3. A lack of a backup plan
You should have the option to name a contingent beneficiary. This person would receive the funds in the event your primary choice is unable to do so (or chooses to disclaim them). Providing this information gives you more control – and can help avoid some of the other potential issues mentioned here.
4. Designating an individual with special needs
Providing for a loved one with special needs requires meticulous planning. Oftentimes this means establishing a financial strategy that allows them to qualify for vital benefits. If this loved one is a designated beneficiary, it can undermine all of your other preparations. If they inherit a significant sum of money directly, they will almost certainly become ineligible for those important support programs.
5. A lack of creditor protection
If funds go directly to a beneficiary, they are generally not shielded from creditors. This means the recipient, instead of benefiting from a financial gift, could end up in a more complicated situation. Instead, you may need to rely on some creative estate planning tactics to ensure heirs actually receive what you intended.