Avoid Beneficiary Mistakes

When she died in 2001, Anne Friedman’s $900,000 pension went not to her loving husband of 20 years but to her sister, who refused to share her unexpected wealth with her brother-in-law.

How did this happen?

Anne filled out her beneficiary form for her retirement account naming her sister 20 years before she married and never thought about the need to update the form.

When you designate a beneficiary, you are naming one or more persons who will receive benefits when you die – usually retirement benefits and insurance proceeds. What you may not know is that your beneficiary designation for these assets prevails over anything you designate in your will or your trust.

For example, suppose Jennifer has two children, Sara and Sam. Jennifer’s will states she wants Sara to have the house and Sam to have everything else. When Jennifer dies, she has a house and a 401(k) account. The proceeds of the 401(k) plan are paid to Jennifer’s designated beneficiary – in this case Jennifer had designated equal shares to Sara and Sam. The 401(k) beneficiary designation overrules the will. As a result, Sara gets the house and one-half of the 401(k) and Sam gets one-half of the 401(k), not what Jennifer intended.

When you make a will or a trust, make sure your beneficiary designations match what you want to do.

The results of not updating your beneficiary designations or improperly filling out the forms can be disastrous. The first mistake many people make is not updating their beneficiary forms. Any major life event should prompt you to review your assets and how you want to dispose of them when you die. Consider the horror of paying out your life insurance proceeds to your ex-spouse, simply because you forgot to update your beneficiary forms.

What are some of the most common mistakes?

1.) You can’t find your beneficiary designation form. Go to the IRA or 401(k) plan administrator or insurance company and ask for a copy of your form. Your later dated beneficiary forms count. If the beneficiary designation is not what you want, update it and confirm the receipt of the updated form by the IRA or 401(k) administrator or insurance company. It is amazing to me how many people think they have filled out a beneficiary designation form only to find out no beneficiaries have been designated. Once you have designated a beneficiary, make sure you receive confirmation of receipt of the form.

2.) You fail to designate a back-up beneficiary. This means someone who receives the proceeds if your primary beneficiary is also deceased. Suppose you name Uncle Fred as the primary beneficiary of your life insurance policy. When you die, if Uncle Fred is also deceased, the Probate Court is likely to be in charge of determining who takes the life insurance proceeds. This problem can be avoided by designating a “contingent” or secondary beneficiary to take if the primary beneficiary is deceased.
But, be careful of the forms you use to designate beneficiaries. I had one client who thought she was naming her two children and four grandchildren as beneficiaries of her large insurance policy. However, she filled in the name of one child with his two children as the “primary” beneficiary and the other child and her two children as secondary beneficiaries. This meant that only the first child and his children would get the insurance proceeds. The good news is this was easily corrected by filling out the form properly.

3.) You name a minor as the beneficiary. There are two major problems with this. First, a minor cannot control funds; the minor’s guardian has control over the funds. Second and most importantly, when the minor reaches the age of majority (21 or 18 in some states) the minor will inherit the funds. How do you feel about an 18 or 21-year-old gaining control of a large lump sum of money? Do you really think they will act prudently? You are much better off setting up a trust to control when the money will be distributed.

4.) Your beneficiary designations are vague. John married twice and raised two natural born children and three step-children. On the beneficiary designation for his life insurance, he designated his “children” to receive the proceeds. Unfortunately, the three step-children were excluded and received nothing, which was not his intent.

5.) You name a beneficiary who is receiving disability benefits. This is a very sad scenario since the receipt of funds to persons who also are receiving disability benefits may cause them to lose the benefits entirely. Those persons must receive funds through a special needs trust. This enables them to take the inheritance you want to leave them in such a way that it doesn’t disqualify them from continuing to receive disability benefits.

6.) You name one child as the beneficiary thinking that child will take care of all the other children. That child has no legal obligation to do so and can legally take all.

I could go on, but you get the point.

Don’t delay. Take a hard look at your beneficiary designations and make sure that you have filled out the forms so that your intentions are clear.

Lyn & TeddyAbout the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.