Many people overlook the importance of naming life insurance, annuity, and retirement account beneficiaries. Often, making a mistake when naming a beneficiary will result in an expensive and lengthy probate process upon the policy or account holder's death. Because these accounts and policies will provide for your loved ones when you die, the importance of avoiding these easy to make mistakes can't be stressed enough.
Not Updating Your Beneficiaries
Naming a beneficiary is not a “set it and forget it” legal measure. In fact, experts recommend you review and update your beneficiaries every two-three years or immediately upon any death, marriage, divorce, birth or other significant life events. If you are married, your spouse is your beneficiary. But people often fail to update their beneficiaries when their spouse dies, or they divorce. Save your loved ones the time, expense, and headache of the probate process and update your beneficiaries regularly.
Not Naming a Contingent Beneficiary
People name beneficiaries with the best intentions in mind. But in that idealistic mindset, many policyholders fail to consider what would happen if their beneficiary dies. Again, this is the type of mistake that could result in a costly probate process.
Naming a Minor as a Beneficiary
You want to make sure your children will be provided for if you die. But naming your minor child as a beneficiary can have disastrous results, as they might not be ready to inherit a sum of money and use it responsibly. Consider setting up a trust and naming the trust as a beneficiary. By doing this, you can control how and when the money is used.
Being Vague When Naming Beneficiaries
When naming beneficiaries, do not use vague terms such as “my children” or “my grandchildren.” Be specific and name each beneficiary along with contingent beneficiaries should one of your beneficiaries pass away. For example, if you want your grandchild to inherit your child's share should your child die, you must specify so, or your child's share may be passed to your other children.
Naming a Beneficiary Who Receives Government Benefits
Many people fail to consider whether a beneficiary would actually benefit from a life insurance policy or annuity when they die. In reality, such an inheritance could render a beneficiary with special needs who receives government benefits ineligible to continue receiving benefits. Ultimately, this may not be in his or her best interests. Consider establishing a special needs trust and naming the trust as a beneficiary. The trust can then be structured to supplement the benefits but not eliminate them.
A Note on Benefit Hierarchy
It's important to note that your beneficiary designations will always supersede your will. No matter what your will stipulates, the beneficiary named on your policy or account will receive that asset. Failing to account for this can result in unintended conflict among your heirs. Thus, it's imperative to carefully choose your beneficiaries and name them explicitly while also considering the intent of the benefit. This is another reason why it's so important to regularly update your beneficiary designations to ensure they continually represent your wishes.
Also, consider how an inheritance will impact your beneficiaries. How will it affect their tax liability or the benefits they receive? Will it ignite conflict among your loved ones or work to comfortable support them? And are they capable of managing an inheritance without guidance or restrictions? A seasoned California estate planning attorney can walk you through answering these questions and more to ensure you avoid all of the above mistakes when naming your beneficiaries.
Naming a beneficiary is an important step in estate planning and not one that should be taken without sufficient forethought. Always work with an estate planning attorney to ensure your wishes will be honored when you die and spare your loved ones from probate court battles.
Do you need to name beneficiaries? Fresno area estate planning attorney Christopher Martens can help you carefully plan your estate to preserve wealth and protect your loved ones' interests. Attorney Christopher Martens has the skills and knowledge needed to help you ensure your wishes are carried out properly. Serving the Visalia and Fresno areas, The Law Offices of Christopher Martens can provide strategic estate planning guidance. Call our office at 559-967-7386 or email us at [email protected] for a free consultation.