It happens quite often. A prospective client will call because they discovered that assets they thought they were receiving (life insurance, bank accounts, retirement accounts) went to someone else after their loved one passed away. Beneficiary listings are not set it and forget it. (See this post about regularly reviewing your beneficiaries).
Let’s go through some of the big mistakes that happen with beneficiaries and how you can avoid them.
Once upon a time…
John and Jane were married right after college and started a wonderful life together. They were on the path to financial security and they both purchased private life insurance. In their mid-30’s, John and Jane unfortunately divorced.
A few years later, John remarries, opens a business and his business booms. He is maxing out his retirement account, and investment accounts increased the amount of his life insurance and is planning for a lavish retirement for him and his second wife, Ann. One day, John is killed in a car accident. Ann is devastated but doesn’t worry much about her financial security because she knows that they diligently saved, and John has that big life insurance policy that will provide for her. She submits the paperwork to claim the account as the beneficiary, but the account manager tells her that they can’t help her. She doesn’t know why. It turns out, that Jane is still listed as the beneficiary! Jane will get the life insurance death benefit. All of it!
That’s not what I meant to happen!
How is this possible? Despite the fact that John and Jane divorced several years ago, the beneficiary wasn’t updated and Jane is the legal beneficiary! Naming a beneficiary is a legally binding document, and it trumps any other document you have, such as your will or your trust. Many people forget to update their beneficiaries after marriage, divorce or another change in their family situation.
So, one big mistake with beneficiaries is not updating the beneficiary listing making sure that the asset is going to the person you want to receive it. That asset may go to a former spouse or someone else you really didn’t intend to support. What are some other mistakes that happen with beneficiaries?
Top 5 Mistakes about Beneficiaries
- Not naming a beneficiary at all. This is where that dreaded probate word comes up. Without a beneficiary, your assets would go to your estate, and in order to claim it, your estate would likely go through the probate court process.
- Some people fail to name a contingent beneficiary. What is a contingent beneficiary? Think of this as the second person in line. What if your primary beneficiary predeceases you or you both die at the same time? Naming a contingent beneficiary gives you that back up plan – you have named someone else to receive your property.
- Another common mistake is naming minor children as beneficiaries. What? But don’t you want your kids to get your stuff? In general, yes, but naming them as a beneficiary won’t necessarily accomplish your goal. If you name a minor child as a beneficiary to your life insurance policy, they will receive that money as soon as they turn 18. How responsible were you with money when you were 18? Would you have been able to manage a large sum like a life insurance payout? It is likely that this payout will not serve your children well, and it will be spent within a couple of years.
- What about special needs individuals? For the purpose of this discussion, I am using this term to describe individuals who receive a government benefit such as supplemental security income or medical assistance based on a disability. If they receive a large sum of money, this may disqualify them from receiving the benefit. The individual would then need to spend down their inheritance before applying for the benefit again, and that defeats the purpose of the inheritance!
- Another mistake? Naming beneficiaries on all of your assets but still having real estate. Without proper planning, if you die owning real estate (even with a will), your estate will go through probate. If the only asset in probate is the house, it will be difficult for the personal representative of your estate to pay for the taxes and maintenance required on the house or real property during the probate process. This mistake would essentially tie the hands of the person responsible for managing the property – and they may have to use their own money to protect the asset or risk losing it because of taxes and other issues.
You can see that naming and maintaining beneficiaries is pretty important. There are some unintended consequences of not updating beneficiaries. Look, we know it’s paperwork and most of us don’t like to do this type of thing – it’s kinda like paying bills, but it’s important to manage your beneficiary listings and it will help your loved ones when you pass away.
What should you do today?
Review your beneficiary listings, and update them. Be sure that your loved ones receive the assets you intend when you pass away. Beneficiary listings are an important piece of the puzzle for your estate plan.