5 Common Beneficiary Designation Mistakes

Beneficiary designation is the act of naming one or more person who will receive benefits when you die. This can include benefits from your life insurance policy, your 401(k) plans, your IRAs, your retirement savings and anything else you want to leave to the individuals in question. Unfortunately, the process of beneficiary designation can get complicated, especially when more than one beneficiary is involved. You can prevent many potential problems by avoiding some of the most common beneficiary designation mistakes. They include the ones outlined below.

1) Naming Minors as Beneficiaries

Under the law, if you name minors as beneficiaries, they can't receive all of their benefits until they are 18 or older. The court will appoint a trustee to handle the money until they turn 18. The problem is that the guardian has the freedom to use that money however he or she wants. That means that, by the time the beneficiaries turn 18, they many not have much of the inheritance left. You can avoid this by setting up a trust fund for them. You will be able to choose a trustee you can trust and set up as many guidelines and limits as you want to make sure the funds are secure until they turn 18. Once you set up the trust fund, you can designate it as a beneficiary.

2) Not Coordinating Your Beneficiary Designation and Your Will

Many people think that their will is their last word on who should get their assets. They don't bother changing their beneficiary designation, thinking that changing their will is enough. In reality, the opposite is true--the beneficiary designation automatically overrides your will. So, if you change your will, you have to make sure you change your beneficiary designation as well.

3) Not Naming Alternative/Successor Beneficiaries

When naming beneficiaries, many people do not consider the possibility that those beneficiaries could not survive to get the inheritance. For example, you may designate your son as a beneficiary and leave it at that. However, there is always a possibility that he could die in an accident. If he had any children, they would get nothing. This is why it is important to designate successor beneficiaries, beneficiaries who will receive the benefits if the original beneficiary dies. You should do it even if you don't have grandchildren (or other potential successor beneficiaries) when you designate your beneficiaries. After all, you never know what may happen in a few years, so you want to be flexible.

4) Naming Your Estate as a Beneficiary

Naming your estate as a beneficiary isn't a bad idea if you have no heirs. But for most people, doing so will pose far more problems than it's worth. If you name your estate as a beneficiary, your assets have to go through probate. This will give the courts a say in how the assets are distributed. Most importantly, the court has the right to use those assets to repay your debts or your heirs' debts, reducing their value. Furthermore, naming the estate as the beneficiary will also increase your heirs' income taxes and reduce their tax benefits.

5) Making Errors on the Application

This mistake seems like an obvious one to avoid, but it occurs frequently enough to be worth pointing out. When you designate beneficiaries, you will need to make sure the beneficiaries' names and Social Security numbers are entered correctly. Otherwise, your beneficiary designation may wind up being legally invalid, and your descendants will be left with nothing. Worse, your assets may wind up going to complete strangers. This is why you will need to be very careful when you fill out your beneficiary designation paperwork.

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