Five Beneficiary Mistakes That Can Derail Your Estate Plan
You can spend thousands of dollars creating the perfect estate plan, but a beneficiary form you filled out 20 years ago could potentially undo much of that planning.
Beneficiary designations are easy to overlook. People often complete them when opening an IRA, 401(k), or life insurance policy and rarely think about them again. But these seemingly simple forms can determine where a significant portion of your wealth ultimately goes.
Here are five common mistakes to avoid.
One of the biggest misconceptions is that your will determines who receives all your assets. It doesn't.
IRAs, 401(k)s, life insurance policies and certain bank and investment accounts generally pass according to their beneficiary designations. If your will divides your estate equally among three children but your IRA names only one child, that IRA will generally go to the person named on the account.
Life changes. Beneficiary forms don't.
Marriage, divorce, deaths, births and changing family relationships are all reasons to revisit your designations. You'd be surprised how often we come across an ex-spouse, deceased relative or someone named decades ago that is still listed as a beneficiary.
Think of a contingent beneficiary as your backup plan. If your primary beneficiary dies before you, or you die together, the contingent beneficiary is next in line.
Without one, the account could pass potentially through your estate, which may not produce the result you intended.
Leaving substantial assets directly to young children — while generous — can create unnecessary complications. Minors generally cannot control significant financial assets themselves, potentially requiring a custodian or court-appointed guardian.
For parents and grandparents, coordinating beneficiary designations with a properly designed trust or other arrangement can provide greater control over how and when the money is used.
Not every inherited dollar is equal.
Someone inheriting cash or certain taxable investments may face very different tax consequences than someone inheriting a traditional IRA. Under current rules, many nonspouse beneficiaries must empty an inherited retirement account within 10 years, and some may have distribution requirements along the way.
That's why good estate planning isn't always just about deciding who gets what. It can also mean carefully considering who should get which assets to maximize the after-tax value of your estate.
The good news is that beneficiary mistakes are often among the easiest estate-planning problems to prevent. We suggest at least annually — and especially after a major life event — take a few minutes to review the beneficiaries on your accounts. Changing them is typically quite simple.
Your estate plan may be hundreds of pages long, but sometimes it's a one-page beneficiary form that determines whether your wishes are actually carried out.
Collin Randall, CFA, CFP, is a financial adviser at Randall & Associates Wealth Management, with offices in Butler and Warrendale. Randall & Associates Wealth Management Inc. is a registered investment adviser and does not provide any legal, accounting or tax advice. The opinions expressed here reflect the judgment of the author as of the date of the article and are subject to change without notice.
