7 Mistakes Made on Beneficiary Designations


Beneficiary designations ensure that accumulated wealth goes to your intended heirs and beneficiaries. Yet, most individuals fail to regularly review them, even after a significant life event. Here are 7 common mistakes to avoid making on your beneficiary designations:

1. Naming the estate as a personal life insurance policy beneficiary.

First, the proceeds are now subject to probate or intestate administration which may delay access and use of the proceeds by your surviving family members. Second, it will subject the proceeds to federal and state estate
taxes regardless of how policy ownership was structured. Third, any creditor protection that may have covered life insurance proceeds under state law may be lost. Fourth, proceed distribution is now subject to the terms of your Will or intestacy proceedings, which may or may not be what you intended. Naming an individual, for a personally owned policy, or the trust, for a trust-owned policy, is the appropriate method.

2. Failure to name a contingent beneficiary.

It’s important to name primary and secondary beneficiaries, and perhaps even tertiary beneficiaries. This helps ensure that the asset goes to the individual or organization intended, even if the primary beneficiary has predeceased. Otherwise, the asset will be included in the estate which means, similarly to #1 above, having the asset go through probate or intestate administration and the resulting delay in access and use of the asset and unnecessary legal and administrative fees.

3. Naming a minor child as a life insurance policy beneficiary.

An insurance carrier will not pay benefits to a minor. This may lead to court proceedings to designate a custodian, conservator or trustee for the minor’s benefit to receive the proceeds. That delays access and use of the proceeds and causes unnecessary legal and administrative expenses. If the minor is intended to be the policy beneficiary, then a trust should be named as beneficiary.

4. Failure to remove an ex-spouse as beneficiary.

Depending upon the type of financial product and the state you live in, a divorce may not automatically remove your ex-spouse as a beneficiary. Beneficiary designations should immediately be changed upon a divorce.

5. Failing to regularly review beneficiary designations.

Are people that have already passed away or family members who have been estranged or otherwise provided for still beneficiaries on your accounts? Beneficiary designations should be reviewed regularly and certainly
after a significant life event.

6. Failure to account for “special needs” children.

Do you have a special needs child? Do you have well-intentioned family members who may have listed your child as a financial product or account beneficiary? Those good intentions may now disqualify your child from various
benefits and governmental assistance. In situations involving special needs planning, careful attention to the details matter.

7. Failure to coordinate all beneficiary designations with the overall estate plan.

People often forget that beneficiary designations on their financial products and accounts control who gets the asset; not the beneficiaries in a last will. Forgetting to coordinate all beneficiaries with your estate plan may result in adverse tax consequences, failure to leave the estate in the manner intended (e.g., children don’t get an even share), or worse, inadvertently leaving out a family member from an inheritance.