Many people believe that a will or revocable trust determines how all assets in an individual’s estate are distributed upon their death. However, some of the most valuable assets, such as bank accounts, life insurance policies, and retirement accounts, often are passed based upon beneficiary designations. While this allows them to be transferred outside of a costly and inconvenient probate proceeding, people need to be aware how this affects their overall estate plan. As such, the naming of beneficiaries is an important part of the estate planning process. Careful consideration should be given to designations, and to ensure an easy process, avoid making the following mistakes. 

What to Avoid When Making Beneficiary Designations

1. Not Naming Contingent Beneficiaries 

Each asset that’s held in beneficiary form should have a primary and contingent beneficiary. This allows the decedent to remain in control over who the inheritance goes to, even if their first choice is unwilling or unable to accept it. If a contingent beneficiary isn’t named, the asset will become subject to probate and distributed according to the state’s intestate succession laws. 

2. Naming a Minor or Someone With Special Needs as a Direct Beneficiary

It’s not always in the best interest of loved ones to be named as a direct beneficiary, as it can have unintended consequences. For example, life insurance companies don’t pay out death benefits to minors. In turn, if a minor is the designated beneficiary of a policy, the court must appoint someone to manage the proceeds on their behalf. This results in extra expenses and delayed access to the funds. Also, naming someone with special needs as a direct beneficiary can disqualify them from government programs.  These situations are where revocable trusts can be very useful in managing the funds for the intended beneficiaries.

3. Naming a Child as Co-Owner of an Account or Real Property

It’s common for elderly parents to add adult children to their bank and investment accounts so they can help oversee financial transactions or to add the child to the title of their real property. Many don’t realize that once the child becomes co-owner of an account or real property, their creditors can make a claim against it, including a child’s spouse in a divorce proceeding. Additionally, tax laws consider this a gift, which means it could have gift tax consequences. 

4. Failing to Review & Update Beneficiary Designations

All estate planning documents should be reviewed periodically and revised as necessary. After major life events like getting married or divorced, having a child, buying a house, or moving to a different state, beneficiary designations should be reconsidered to make sure they properly reflect current circumstances. Failure to do this can result in estranged family members receiving assets.

For help developing a thoughtful and effective estate plan that adequately provides for your loved ones, turn to Ng & Niebling in Honolulu, HI. Backed by more than 30 years of experience, their attorneys are qualified to advise you on all aspects of estate planning to ensure your unique goals and needs are met. Call (808) 732-7788 to request a free consultation, or visit them online to learn more about their legal team.