Man Signing his will

4 Mistakes to Avoid When Designating a Beneficiary

When you open up a 401(k) or IRA account, you will be asked to designate the beneficiaries of your account. The beneficiaries you choose will receive the assets in the account upon your death. Many people choose their spouses or children as the beneficiaries of their 401(k) or IRA accounts. Most of us fill out the forms and designate a beneficiary without giving the process much thought. In some cases, appointing a beneficiary can cause family turmoil and create confusion.

Types of Beneficiary Designations

Many different types of financial accounts use beneficiary designations. IRAs, annuities, 401(k)s, and life insurance policies will ask you to designate who will own the asset when the owner dies. Unfortunately, there are a few mistakes that people often make when appointing a beneficiary.

1. Naming one Beneficiary for All Accounts, or a Different Child for Each Account

Some parents try to achieve fairness by naming a separate child for each of their different accounts. If fairness is your goal, this might not be the best strategy. Every account will be unique and will end up having different balances over time. At the time of your death, the balances in the accounts could vary greatly. 

Or, parents sometimes name one child as the beneficiary on all of the accounts, hoping that the child will divide up the assets equally among his or her siblings. The child receiving the assets in the account will not be under a legal obligation to distribute the inheritance. This may not seem like a problem but it quickly can become if that child is divorcing, being sued or has personal debt. Also, this strategy could leave one child with significantly more gift tax liability. One solution is to state that you’d like the accounts distributed “per stripes” to all children, meaning equally distributed among all children upon your death. 

2. Thinking That Your Will Could Override Your Beneficiary Designations

Many people think that their will is the most important estate planning document. They assume that their will trumps any beneficiary designation forms they have filled out. In reality, the will only controls assets in a person’s probate estate. The assets in your retirement accounts are not governed by your will as they pass to beneficiaries outside of the probate process. Every time you review the terms of your will, you should review your beneficiary designations. 

3. Failing to Update Your Beneficiary Accounts

When big life changes happen, most people remember that they need to update their will to reflect these changes. It is more difficult to remember to update your beneficiary destinations after a life change, however. 

Whether you’ve been married, divorced, or you’ve welcomed a new child, it is important to review and update the beneficiaries of your financial accounts. We advise people to keep a list of all of their accounts so that no account falls through the cracks. We also recommend keeping hard and electronic copies of your beneficiary designations, including any updates that you make. 

4. Not Developing a Contingency Plan

No parent wants to outlive his or her child or spouse. If your beneficiary passes away before you pass away, problems could arise. At Surprenant & Beneski, PC, we can help you plan for contingency. Depending on your goals, we can help you indicate whether you’d like to designate your beneficiaries as per stripes or per capita. 

Depending on which option you select, a deceased beneficiary’s family will get his or her share of the assets, or the assets will go to all of the other living beneficiaries. If you need assistance engaging in estate planning, we can help. Contact our experienced Southeastern Massachusetts law firm today to schedule your initial consultation.

©Surprenant & Beneski, P.C. 35 Arnold Street, New Bedford, MA 02740, 336 South Street,   Hyannis MA 02601 and 45 Bristol Drive, Easton MA 02375.  This article is for illustration purposes only.  This handout does not constitute legal advice.  There is no attorney/client relationship created with Surprenant & Beneski, P.C. by this article.  DO NOT make decisions based upon information in this handout.  Every family is unique and legal advice can only be given after an individual consultation with an elder law attorney.  Any decisions made without proper legal advice may cause significant legal and financial problems.