If you have ever spent time working through your estate plan with a professional, you know how important it is to update your beneficiaries. Failing to do so can result in costly mistakes – for you and your loved ones. Here are six big mistakes that can easily be avoided with a bit of proactive planning:
Mistake #1 – Not naming a beneficiary
Ensure you have listed beneficiary designations on all of your retirement accounts. If you do not name a beneficiary and your estate becomes your beneficiary rather than a relative or loved one, your relative can lose their ability to use "stretch" payouts based on their life expectancy. This loss means that the ability to retain tax-advantaged status for the assets is lost and the probate process cannot be avoided.
Mistake #2 – Not listing contingent beneficiaries or contemplating disclaimers
Your spouse or partner is likely your primary beneficiary for most accounts, but if he or she passes away first and no contingent beneficiaries are listed, it is comparable to having no beneficiary designation. If you both die at the same time, funds go into probate – a process most families want to avoid. Naming contingent beneficiaries also gives the primary beneficiary the option to execute a qualified disclaimer so some assets can pass to "next-in-line" beneficiaries. For example, a primary beneficiary may not wish to claim the assets because of tax implications, and prefer instead they pass on to another beneficiary.
Mistake #3 – Lacking specifics in beneficiary designations
You may list "children" as your beneficiaries, but including specific names may be more appropriate – especially if you are part of a blended family. Many states will not include or recognize stepchildren when the word "children" is listed. Another risk of vagueness is that a family member you have lost contact with may enter the picture and try to claim a piece of your remaining assets. Note that listing specific names makes it even more critical that beneficiary designations are updated when major life events happen that require names be added or subtracted. Also consider consulting with a qualified legal professional, as these circumstances can become complex.
Mistake #4 – Failing to keep designations up to date
Beneficiary designations override your will, so it is crucial to keep them up to date. You may need to update your beneficiary designations every few years due to life changes or if beneficiaries have died or your relationship with them has changed. This updating is particularly applicable if you have gone through a divorce or remarried. If your ex-spouse inadvertently remains the designated beneficiary of an account, he or she may have the upper hand if the case winds up in court.
Mistake #5 – Failing to keep beneficiary designation forms on file
Keep copies of updated beneficiary designation forms on file. In this age of mergers-and-acquisitions, the records of an acquired custodial company can potentially be lost or destroyed when a new firm assumes ownership. Without a verifiable form to prove beneficiary status, the "default" provision of the plan applies, which typically may be phrased as "spouse first, if living; if not, then the estate."
Mistake #6 – Not considering the financial or emotional readiness of beneficiaries
The money that designated beneficiaries receive from IRAs or qualified plans is unrestricted in most cases. You cannot control who gets what amount of money or when, nor limit how money is used unless restrictions are put in place in advance. One restriction is naming a trust as the beneficiary and drafting terms which stipulate when specific individuals receive their share of the accounts. Trusts are often used in cases where a beneficiary is unable to manage his or her own financial affairs, lacks financial responsibility, or in complex family situations.
Estate planning is not the most enjoyable part of planning for your financial future, but it is crucial to help ensure that your assets are handled the way you desire after you no longer have control. Beneficiary designations can be complex and differ depending on your situation. Consider working with a financial advisor who can help you update your beneficiaries on financial accounts and provide financial guidance through major life events.
Ameriprise Financial does not provide tax or legal advice. Consult your tax advisor or attorney.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.
This communication is published in the United States for Texas only; and this advisor is licensed only in the states of CA, CO, FL, KS, MO, NC, NM, OK, TX, and VA.
M. Ahmad Adnan, CFP®, CRPC®, RFC®
Business Financial Advisor
Ameriprise Financial Services, Inc.
3200 Steck Avenue | Suite 250 | Austin, TX 78757
Phone: 512.213.6400 Ext. 102 | Toll Free: 866.238.4230
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