Beneficiary Comment: Common Mistakes When Making Designations
Once you’ve bought an annuity or a life insurance policy and named your beneficiaries in your account, you may never think about those beneficiary designations again. However, that could be a big mistake.
Specific agreements, such as those made during a divorce, can significantly impact your beneficiary designations.
Let’s say you divorce and remarry and forget to change your beneficiary from your ex-spouse. Your ex-spouse will be smiling all the way to the bank. There won’t be much that your new spouse can do if you forget to make that change before you die. Any time there is a life change, including happy events like marriage, birth, or adoption, your beneficiary designations need to be reviewed to ensure the right people benefit, says the article “One Beneficiary Mistake You Really Don’t Want to MakeKiplinger.
Beneficiaries are entitled to various benefits, such as inheritances or insurance claims, which need to be clearly designated.
If there are new people in your life you would like to leave a bequest to, like grandchildren or a charitable organization you want to support as part of your legacy, your beneficiary designations will need to reflect those as well.
For people who are married, their spouse is usually the primary beneficiary, and children are contingent beneficiaries who receive the proceeds upon death if the primary beneficiary dies before or at the same time that you do. It is wise to notify any insurance company or retirement fund custodian about the death of a primary beneficiary, even if you have properly named contingent beneficiaries.
Understanding how money is distributed among beneficiaries is crucial, especially in complex family situations.
When there are multiple grandchildren, things can get a little complicated, and you may need to pay close attention to how you designate beneficiaries. Let’s say you’re married and have three adult children. The first beneficiary is your spouse, and your three children are contingent beneficiaries. Let’s say Sam has three children, Dolores has no children and James has two children, for a total of five grandchildren.
The payment process for distributing assets can be intricate, requiring careful planning to ensure all beneficiaries receive their due share.
If both your spouse and James die before you do, all of the proceeds would pass to your two surviving children, and James’ two children would effectively be disinherited, which is probably not what you would want for any person in your family. However, there is a solution. You can specify that if one of your children dies before you and your spouse, their share goes to his or her children. This is a “per stirpes” distribution.
It is essential to clearly identify each person designated to receive benefits to avoid any disputes.
This way, each branch of the family will receive an equal share across generations, simplifying the process of distribution. If this is what you want, you’ll need to request per stirpes, because equal distribution, or per capita, is the default designation. Not all insurance companies make this option available so speak with your insurance broker to make sure this is set up properly for insurance or annuities.
Each recipient must be clearly identified to ensure they receive their intended share.
Any assets that have a named designated beneficiary are not controlled by your will, which means that a sole beneficiary can receive assets directly. Consequently, when you are creating or reviewing your estate plan, create a list of all of your assets and the desired beneficiaries for them. Your will help review all of your assets and means of distribution, so your wishes for your family are clear.
These assets are subject to the terms of the beneficiary designations, not the will.
Reference: Kiplinger (March 23, 2021) “One Beneficiary Mistake You Really Don’t Want to Make
