Estate planning is about beneficiaries; who you want to name and what kind of assets you want to leave to them.
When you discuss important estate planning matters with your attorney, the subject of heirs will come up often. Here are six mistakes to avoid regarding your beneficiary designations.
1. Not naming beneficiaries
If you neglect to name a beneficiary on your retirement accounts or life insurance policy, those assets will likely go through probate when you pass away. You should complete a beneficiary designation form even if your estate is your beneficiary.
2. Forgetting about contingent beneficiaries
When naming your primary beneficiary, do not forget about naming a contingent beneficiary, meaning the person who would inherit the asset if his or her predecessor should die or be removed as the heir.
3. Failing to update designations
If you have remarried, update your beneficiary designations. Remember that, originally, you may have named your former spouse, who will receive a particular asset directly if you die without making a name change.
4. Naming a minor as a direct beneficiary
You should think carefully before naming a minor child as the beneficiary of your life insurance policy. Following your death, the proceeds will go to your child when he or she reaches the age of 18. Most young people are not ready to handle large sums of money responsibly at that age.
5. Naming a special needs person as a direct beneficiary
If you name a special needs person as your beneficiary, you may prevent him or her from receiving government assistance, such as Supplemental Security Income. A solution to this is to set up a special needs trust to hold the inheritance, so as not to interfere with the receipt of government benefits.
6. Naming a financially irresponsible person
In the same vein, you can create a “spendthrift trust” to hold an inheritance for a loved one who has proven to be financially irresponsible.
These six mistakes in making beneficiary designations are not the only ones you could make. When you prepare or update your estate plan, your attorney will help you identify others, if any exist, and help you make the appropriate changes.