Natalie scrunched up the letter in her hand and tossed it into the trash. “Thanks for nothing, Uncle Fred.”
Her husband, John, frowned. “Bad news?”
Natalie shrugged. “Remember when Uncle Fred said he was going to pay the college tuition for all his nieces and nephews?”
“Sure, we figured that into our financial plan. It will be a big help.”
Natalie harrumphed. “Not any more. The old fool didn’t fund the trust he created for that purpose. He bought the insurance policy alright, but he named his son, the proposed trustee, as the beneficiary. All the money from that life insurance policy goes directly to him.”
John’s eyes narrowed. “That can’t be right. Surely, Fred told his son how the money was to be used.”
Natalie shook her head. “The lawyer called it an error in beneficiary designation. His son has no obligation to fund the trust. Apparently, he has no intention of doing so.”
A lot of work goes into creating an estate plan. In most cases, an attorney, financial planner, and insurance agent work together to create a financial legacy. They assist the estate holder in managing and retitling assets so that all bequests are funded upon death. One of the most important tasks a testator undertakes is the completion of beneficiary designation forms.
In most cases, beneficiary designations are required for life insurance, retirement funds, and annuities. They may also be required for bank and brokerage accounts. Designating a beneficiary ensures that intended heir receive assets directly. When forms are completed correctly, the assets do not have to pass though probate. Usually, all that’s required is the submission of a death certificate. A check is then issued within months.
However, mistakes happen, and they can be costly. In fact, the road to failed estate plans is littered with incomplete, misguided, and erroneously completed beneficiary designation forms. Some common mistakes:
- Failing to name a beneficiary. Some testators may not realize they have to name a beneficiary for certain accounts. Others may believe a will covers the distribution of funds. And still others simply don’t get around to it. Unfortunately, if you fail to complete a beneficiary designation form, the company that owns or manages a financial account decides where your money goes. Most likely, funds will be awarded to the estate, under the control of the probate court. The executor will use those funds to pay funeral expenses, estate taxes, administrative expenses, and outstanding debt—in that order. The remainder, if there is any, will go to heirs. If the beneficiary designation form is completed, all of the account proceeds are distributed directly to intended heirs, bypassing the probate court.
- Failing to take into account the age or limitations of a beneficiary. Minors, individuals with special needs, people with creditor issues, and people unable to properly manage money should not be designated as beneficiaries on financial accounts. Minors are not legally competent to claim the proceeds. A conservator will have to be appointed by the court to manage those funds. Individuals with special needs may depend on means-based benefits. Receiving an asset of any value could negatively impact those benefits. In those cases, it may be necessary to create a trust or special account to receive the funds, and designate that as the beneficiary. Trusts are also a good option for people experiencing problems with creditors or those who have demonstrated an inability to manage their financial affairs.
- Failing to accurately complete the form. Typically, beneficiary designation forms ask for very specific information, such as the full name of the beneficiary, last known address, and social security number. Failure to use complete names or include suffixes, such as Jr. or III, can create problems in identifying the right person. In addition, names may change over time due to marriage, divorce, or legal process. Using a maiden name rather than a married one or a former name rather than the current one is confusing. As a general rule, it is best to state the beneficiary’s name as it is listed on their U.S. Social Security account. Otherwise, the payout may be delayed until the beneficiary’s identity is confirmed. Trust designations typically require the full name of the trust, the trust tax identification number, and the full name, address, and professional affiliation of the trust administrator or named trustee.
- Failing to regularly review and update beneficiary information. Beneficiaries marry and divorce. New beneficiaries are born or adopted. Sometimes beneficiaries die. For that reason, it is very important that beneficiary designations be reviewed and updated on a regular basis. While some accounts call for the names of secondary beneficiaries, there is no guarantee those individuals will be alive or capable of receiving funds. It is best to make changes as they occur so that the intended recipients receive your bequest.
- Failing to consult with your estate planning team. Your team of legal and financial advisers ensure that all beneficiary designations are completed in accordance with your estate plan. They respond to questions and provide counsel when new or complicated beneficiary situations arise. They inform you of changes in the law that impact beneficiary-designated accounts. They can also provide advice on maximizing the use and value of funds in such accounts. Rely on them to ensure your beneficiary-designations are consistent with your estate plan.
Beneficiary designations ensure that the owner of financial accounts has the final say in how those assets are distributed. That right should not be taken lightly. By providing complete and accurate information, you maintain control of your money until death. Isn’t that why you created an estate plan in the first place?