2019 – 08/20 Naming a beneficiary is a routine step for several types of accounts. Doing so assures the balance will go to the designated person when you die, or be divided as you wish among multiple people. Beneficiary designations are needed for life insurance policies, as well as annuities, retirement plans and IRAs.

This sounds like a simple matter, but it’s an area where many plans go awry. Here are some common pitfalls related to beneficiary designations.

#1 Forgetting to turn in your beneficiary form or failing to update it when you get married, divorced or have children

Updating beneficiary forms is a simple task, but it can easily be overlooked, especially if you hold accounts at multiple institutions. When your marital or family status changes, you may update your main accounts, but a small life insurance policy or a 401(k) at a previous employer may be forgotten. Even if you’re pretty sure all your forms up to date, I challenge you to create a file with copies of all of your current beneficiary designations. I’m willing to bet you will have at least one surprise.

Once you assemble that file, it will be much easier to update all your accounts the next time without missing any.

#2 Neglecting to name successive beneficiaries in case one predeceases you

No one wants to think about it, but it’s best to be prepared. Be sure to name a secondary beneficiary in case your primary beneficiary predeceases you. Also, consider when you name multiple beneficiaries how the assets will be distributed if one of them predeceases you. This is often relevant when you name your adult children.

For example:  You name your two children, Sarah and James, as your primary beneficiaries on your IRA.  Sarah and James each have two children. If James predeceases you, his portion will go to Sarah unless the beneficiary designation specifies that James’ portion goes to his heirs (known as per stirpes). We often overlook this possibility because we don’t expect it to happen.

#3 Creating an estate plan but not updating your beneficiary designations in accordance with the plan

You can pass the assets in many types of accounts directly to your heirs simply by naming them as beneficiaries. But when you create an estate plan you may be trying to protect the assets from someone or something: creditors, estranged spouses, taxation. A trust can be used for this purpose and can be named as the beneficiary for some or all of your accounts. However, if you fail to update your beneficiary forms to name the trust, the protection you sought will not be there.

Your attorney should tell you how to update your beneficiary forms when you create an estate plan. If he or she doesn’t cover this with you, be sure to ask.

#4 Not understanding the ownership style of financial accounts

For financial accounts (bank and brokerage) the style of ownership will dictate what happens to the account in the end. Financial institutions routinely guide customers to set up survivorship accounts. You are probably familiar with the phrase “Joint with Rights of Survivorship.” If your spouse is the joint account holder this may be what you want. When one spouse dies, the assets pass to the surviving spouse.

But if you have an adult child on your financial accounts, perhaps because he or she helps you with your financial matters, this may not be the type of account ownership you want. The child on the account with you will be the survivor who receives the funds. You may want the funds to go to your spouse or be divided evenly among your children. A power of attorney may be a more appropriate way for a son or daughter to help you with your finances.

Another dilemma can occur if you set up your accounts TOD or Transfer on Death, to your children. If all your accounts are set up in this manner, the estate may not have liquid assets to pay utility bills and property taxes while your estate is being settled.

Be proactive

It’s not difficult to avoid the common pitfalls associated with naming beneficiaries; it just takes some attention to detail and forethought. To get started, I recommend you create a complete beneficiary file. Talk to your estate planning attorney or other professional about your beneficiary designations. Update your beneficiaries as needed. And review your beneficiary file periodically, especially if there are changes in your family.

Taking these steps can eliminate some difficult situations for your heirs and ensure that your assets go to the people you wish.

Norma B. Spencer, CRSP, ERPA
Manager, Retirement Plan Services
Bland Garvey, P.C.
2600 N. Central Expy., Suite 550
Richardson, TX 75080

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