“When my husband died, not only did I lose my life partner, but all of his retirement assets went to his ex-wife. Now I’m fighting her in court. It is a disaster.”
Stories like this seem improbable but are sadly all too common. Selecting a beneficiary for your investment accounts can seem morbid (and admittedly, unexciting), but the importance of doing so cannot be overstated. Though you work hard saving diligently into your accounts, many people overlook keeping that one little designation form up to date. And that oversight could have vast ramifications for the people you love.
The Five Biggest Beneficiary Designation Mistakes
No estate plan is ironclad, but for accounts that allow for beneficiary designations, there are five big mistakes that I have seen.
- Not having a beneficiary listed: This is perhaps the worst possible thing you can do in a retirement account (outside of not having one). If you die and no one is named to receive your assets, the account will go through probate, which takes time and costs money. Also, the eventual beneficiary (who may or may not be whom you would have chosen yourself) does not have the same ability to stretch distributions over their lifetime, as the account needs to be liquidated within five years.
- Not having a contingent beneficiary: Having just your spouse listed as a beneficiary is not enough because what would happen if something happened to you both? Probate is not fun, so having contingent beneficiaries is another way to make sure your assets do not get stuck in court.
- Thinking your trust or will applies to your retirement accounts: Any account that has a beneficiary designation [IRAs, 401(k)s, annuities, etc.] or a payable/transfer on death designation (POD or TOD) will not be governed by your other estate planning documents. If your will says all your assets go to your sister Sally, but your IRA has your brother Bob listed as the beneficiary, Bob will get the IRA.
- Having an ex-spouse as beneficiary: Whether or not you get along with your ex, do you really want them to receive all of your assets in the event something happens to you? Many widows and widowers have had to go to court trying to get assets from a spouse that had been listed as a beneficiary 25 years ago. Is it worth risking that?
- Minor beneficiaries: This one is tricky. From a tax perspective, having a minor as a beneficiary can be great because he or she has a longer life expectancy to draw down an account. However, leaving benefits to a minor means you also have to select a trustee to manage the account until Junior turns 18. Would your 18-year-old beneficiary be able to handle the responsibility of an inheritance?
By devoting 10 minutes to making sure your beneficiary designations reflect your current wishes, you could save those you love from potentially receiving nothing or tying up tons of time in the court appeals/probate process. You will have peace of mind now, knowing you have taken care of your family, and your beneficiaries will thank you.
