If you’ve ever spent time working on your estate plan, you know how important it is to select and update your beneficiaries. Failing to do so can result in costly mistakes, for you and your loved ones. Here are five common mistakes that can be easily avoided with a little proactive planning:
Mistake #1 — Not naming a beneficiary on all accounts. Make sure you have beneficiary designations on all your bank, investment and retirement accounts, as well as on your insurance policies. If you don’t name a beneficiary on one or more accounts, your estate becomes the beneficiary of that account and your loved ones will have to go through the probate process (a legal process most families want to avoid for financial and emotional reasons). ). If this happens, your relative may lose her ability to use “stretched” payments based on her life expectancy because tax-advantaged status for retirement assets is lost.
Mistake #2 — Forgetting to name a contingent beneficiary on all accounts. Many people list the same loved one, usually a partner or parent, as the primary beneficiary on most or all accounts. If this is how you have managed your assets, it is important that you also name a contingent beneficiary. This is because if your primary beneficiary dies first and contingent beneficiaries are not listed, it is comparable to not having a beneficiary designation. If both die at the same time, the funds go to the estate. Naming contingent beneficiaries also gives the primary beneficiary the option to execute a qualified disclaimer so that some assets can pass to the next loved ones in line. For example, a primary beneficiary may not want to claim the assets due to tax implications or because he does not need the assets and prefers to pass his gift on to another beneficiary.
Mistake #3 — Do not use specific names. One mistake many people make is to include a generic term, such as children, parents, or aunts, instead of specific names in their beneficiary selections. This can be problematic, especially if you are part of a blended family. Many states will not include or recognize stepchildren when the word “children” appears. Another risk of vagueness is that a family member with whom she has lost contact may enter the scene and try to claim a portion of her remaining assets. With this in mind, be sure to use each person’s full name when naming beneficiaries.
Mistake #4 — Not reviewing your beneficiary selections regularly. Beneficiary designations override your will, so keeping them up to date is critical. You may need to update your options every few years due to changes in your life, such as if the beneficiaries died or your relationship with them changed. This is especially true if you have been divorced or remarried. If your ex-spouse inadvertently remains the designated beneficiary of an account, he or she may have the upper hand if the case ends up in court.
Mistake #5 — Not communicating your preferences to your partner and family. Communicating your legacy wishes is an important step in helping your loved ones know what to expect after your death. While it can be difficult to start the conversation, doing so can help reassure loved ones that you have a plan. Please note that you do not need to share the exact amount of money you plan to pass on to the respective family members, unless you prefer. Instead, share high-level details that give your family an idea of how you intend to share your hard-earned wealth.
Estate planning isn’t the most pleasant part of planning for your financial future, but it’s crucial to help ensure your assets are managed the way you want them to be after you’re no longer in control. Beneficiary designations can be complex, and depending on your situation, it can be difficult to decide who to include as a recipient of assets. If you want a second opinion or help evaluating the implications of your options, consult a wealth planner and financial advisor in your area.
Bronwyn Martin is a Financial Advisor and Chartered Financial Consultant with Martin’s Financial Consulting Group, a Wealth Financial Advisory Practice of Ameriprise Financial Services, LLC. in Kennett Square and Havre de Grace, Md. She specializes in both fee-based financial planning and asset management strategies and has been in practice for over 21 years. To contact her, visit www.ameripriseadvisors.com/bronwyn.x.martin
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