Beneficiary designations are helpful tools to make the settling of your affairs after death more efficient and easier on your heirs. Although in many situations the advantages outweigh the disadvantages when selecting beneficiaries, there are always exceptions. It is important to be careful with your beneficiary designations.
What Is a Beneficiary Designation?
Many assets, such as life insurance, bank accounts, annuities, 401(k) accounts, and IRA accounts allow you to select who will receive the asset upon your death. You can typically name these individuals in forms produced by the financial institution.
Outdated Beneficiary Choices
The most common disadvantage is failing to review beneficiary choices regularly to assess whether they still meet your requirements or adjust to any changes that have occurred in your life. For example, perhaps you designated your spouse as the primary beneficiary of your retirement accounts and other non-probate assets. However, if you go through a divorce and forget to change these designations, it could cause expensive delays in your estate and your wishes not to be followed.
Another example may be where new relationships develop that did not exist when you initially made beneficiary designations. For example, you have had more children or remarried. Should you fail to update your beneficiary designations, you may inadvertently omit these loved ones from receiving a share of these assets when you really would have wanted them to receive something.
Failure to Name a Contingent Beneficiary
A related issue is failing to name secondary or contingent beneficiaries. What happens if you do not have a “backup” beneficiary? One of the main disadvantages is that an asset that could typically pass directly to persons outside of probate may now become an asset that has to be addressed through the probate process. This can create a long delay before those assets get to your loved ones, and possibly subject an otherwise exempt asset to creditors.
Minor Beneficiaries
Disadvantages can also arise if you name a minor as a beneficiary and that person is still a minor when you die. If this happens, an insurance company or retirement administrator may not have a way to handle the situation. It would be unable to distribute the funds until a guardianship is established in court (which may be expensive), or the minor becomes an adult. The best solution is often to designate a trust for the benefit of the minor instead.
Risks for Individuals Who Rely on Government Benefits
If your named beneficiary depends on government benefits at the time of your death, they could lose their benefits despite your best intentions. This is because certain public assistance programs require their enrollees to have specific income or asset limits.
A better alternative is to leave assets to a loved one who could be in this position through a supplemental needs trust, rather than leaving it directly to them. This type of trust allows them to receive the assets without losing their eligibility for these programs. The trust also allows the assets to be used for the benefit of the beneficiary while still preserving the government benefits. Additionally, it can ensure that the assets are managed appropriately and used for the beneficiary’s care.
Other Considerations
Another consideration is that sometimes naming a beneficiary can convert an asset that was free from the reach of your creditors into an asset that is suddenly available to them.
In addition to neglecting to name a beneficiary altogether, if a person names their estate as a beneficiary of their life insurance policy, not only does this put the asset into the jurisdiction of the probate court, but it also subjects the funds to your creditors and may be used very differently from what you had in mind. The funds may be used to pay off creditors or taxes owed by your estate.
Consult With an Attorney
It is important to be careful when designating beneficiaries. Consult with the estate planning attorneys at Kurre Schneps to ensure your beneficiary designations fulfil your wishes.
