Contrary to popular belief, your will does not control all assets when you pass away. Beneficiary designations on accounts such as your 401(k) or life insurance policies actually override your will. This means that regardless of what your will says, the person you name in your accounts will directly receive those assets.
Errors made in beneficiary designations can create serious problems for your family. You might accidentally cut someone out of their inheritance or start conflicts that can go on for years. Here are three common beneficiary mistakes to avoid to keep your family safe and make sure your wishes stand the test of time.
Mistake #1: Failing to include all assets
You might overlook certain assets that require specific beneficiary designations. The following accounts exist outside your will and need separate attention to ensure they transfer according to your wishes:
- Retirement accounts
- Life insurance policies
- Annuities
- Transfer-on-death investment accounts
- Payable-on-death bank accounts
- 529 college savings plans
- Corporate benefits, including stock options and deferred compensation
- Digital assets, such as cryptocurrency and monetized online accounts
Without proper designations, these valuable assets might pass through probate or go to unintended recipients.
Mistake #2: Failing to review and update designations
Life moves forward, but outdated beneficiary forms stay frozen in time. The people you named on your accounts years ago might not match your wishes today, especially if you got married, divorced, have a child or lost loved ones. Reviewing your beneficiary designations every few years or after major life events can make sure they still reflect your current family and intentions.
Mistake #3: Overlooking how inheritance affects your loved ones financially
When planning your estate, it is crucial to consider how receiving a large inheritance might affect your beneficiaries. A sudden windfall can push your loved ones into higher tax brackets and cause them to lose important government aid, such as Medicaid or disability payments.
Creating a clear path forward
Beneficiary designations shape your legacy and your loved ones’ financial future. Taking time now to review these important forms prevents heartache and financial complications during an already difficult time for your family. Remember, your thoughtful planning creates security for those who depend on you and honors the relationships that matter most.