4 Tips for Avoiding Beneficiary Designation Errors

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

October 27, 2015

Most of us set up our retirement accounts, name a beneficiary and never think about that designation again. However, it is important to review your chosen beneficiaries on a regular basis, not only to ensure you still want the beneficiary on the account, but also to avoid some common beneficiary designation mistakes.

1. Avoid Leaving Retirement Accounts to Estate

If you have named your estate the beneficiary of your retirement account, there could be unexpected consequences. For example, creditors would be able to attach your retirement account assets for unpaid debts at the time of your death. It is never a good idea to leave your estate as beneficiary and it’s important to keep in mind that not naming a beneficiary could have the same overall result with the added burden of probate.

2. Avoid Children, Seniors and Special Needs Family Members

While you may wish to ensure the financial security of your children and those family members with special needs, it is never a good idea to leave these funds to them directly. Children under the age of 18, or 21 in some states, would have to have a custodian appointed in charge of those funds. For those with special needs, any benefits they might otherwise be entitled to could potentially suffer if they are left an inheritance.

Keep in mind, even children who are not minors under the law could be better off if you place the funds into a trust for their benefit. Statistically, even those in their 20s potentially may not be ready to handle their own finances and instead of building a nest egg, they could burn through the assets in very little time. In all of these cases, the better option may be to leave the money in a trust for their benefit.

Singles often name their parents as beneficiaries which can create a special set of problems. Because inherited retirement accounts are subject to required minimum distributions (RMDs), this could potentially destroy any tax benefits associated with the retirement account, particularly with ROTH IRAs.

3. Avoid the Wrong Trusts as Beneficiaries

Leaving your retirement assets to a trust is generally a good idea, provided the trust is set up properly. A recent Supreme Court ruling allows trusts to be used to protect IRA and other retirement assets from creditors. However, make sure you are using the correct type of trust. For example, a trust for a special needs family member would be best in a supplemental trust, while a see-through trust, which is irrevocable, may be a better option for other family members. Make sure you check with your financial planner for information on what trusts are acceptable to the IRS for your purposes.

4. Avoid Ignoring Life Changes

Many people forget about their designation of beneficiaries after life changes. Divorces, death of a spouse, adopting a child, etc. may all have an impact on your beneficiaries. If you are divorced or your spouse dies, then in effect you have no beneficiary. Generally it is a good idea to name a contingent beneficiary if you have not already done so. Should your primary beneficiary fail to outlive you, your estate would become the beneficiary.

Estate Planning with First Coast Wealth Advisors

We would like to think that our assets are distributed in accordance with our wishes when we die. However, making these common mistakes with beneficiary designations there could be unintended consequences. For most people, reviewing their beneficiaries every few years can help them avoid costly mistakes. When you are doing your estate planning with your financial planner at First Coast Wealth Advisors, we can help you review all your retirement account beneficiaries.

To learn more about estate planning, download our free e-Book on the subject.