Get Your Beneficiary Designations in Order

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.

February 24, 2015


Get Your Beneficiary Designations in Order-media-1

More than $14 trillion is held in tax-deferred retirement account assets such as IRAs, 401(k)s, etc. But many Americans don’t understand the importance of the beneficiary designation form. When it comes to distributing assets, beneficiary designations trump other estate-planning documents, so it’s worthwhile to periodically review them to make sure they’re up-to-date. Some common mistakes that occur with beneficiary designation forms include:

  • No beneficiary named — believe it or not, this is generally the most common mistake.
  • Lack of a contingent beneficiary — if the primary beneficiary dies before the IRA holder and no contingent beneficiary is named, the IRA will be deemed to have no beneficiary.
  • Not naming all children as beneficiaries — there have been cases where individuals have not named all their children as beneficiaries because there was not enough room on the form and because they thought that since all of the children were named in the will, it didn’t matter. Also, if you intend to leave your IRA to multiple children, make sure you define that you want it left in “equal shares.”
  • Naming a minor child as a beneficiary — since a minor lacks legal capacity, naming a minor child as beneficiary creates a set of problems. One alternative is to create a trust for the benefit of the child as beneficiary. Another alternative would be to name a custodian under the Uniform Transfers to Minors Act (UTMA) for the benefit of the child. This is a less expensive option than creating a trust, but the potential downside is that the child inherits the IRA outright when he/she turns 21 (depending on your state).
  • Naming an ex-spouse — this is where things can get ugly. Even if the divorce agreement and property settlement stipulate that one spouse (the wife, let’s say) has no claim on her ex-husband’s IRA, if the beneficiary designation form isn’t updated, the ex-wife would be entitled to the IRA.

While saving and investing are crucial for our financial success, so are often overlooked areas such as beneficiary designations. Even if you already have a solid plan in place, it never hurts to revisit what you’ve done and see if any changes are needed.