A beneficiary is the person or persons designated to receive the benefit of any life insurance, IRA, Annuity or 401k Plan when you die.
Seemingly straightforward, however, there are several mistakes people make when making these designations. For most, the designations where set up years, if not decades ago and some likely can’t remember who they designated as beneficiaries.
Oftentimes, a large percentage of one’s estate is transferred, not by will or trust, but by whom they designated as beneficiaries. I want to make sure that you are not making the following errors.
ERROR #1: NO ONE NAMED AS BENEFICIARY
If no one is named, then that asset gets payable to your estate. What’s the problem with that? Well, now it is part of your estate subject to claims by creditors.
Moreover, say you have a very modest amount of assets totaling under $50,000.00, but you also took out a $250,000.00 life insurance policy with no named beneficiary. Normally, upon your death, your estate would not have to be probated. However, since no one was named on the life insurance beneficiary designation, your estate must now be probated which will cost your estate more money and more time.
ERROR #2: NAMING ELDERLY PARENTS AS BENEFICIARIES
You may have filled out forms at the HR department back when you are started at your company 25 years ago. At that time, you were single, so you put your parents as beneficiaries under your 401k plan and company life insurance.
Well, many things have changed in 25 years! Your parents are nearing 80 and may be in declining health. Do you want those assets to still go to them?
In addition, you now may be married with several small children. Certainly, you would want your family to have those assets and not your parents.
ERROR #3: NAMING MINOR CHILDREN AS BENEFICIARIES
Normally, the company handing your 401k plan or life insurance will not send out a check payable to minor children. That means a court would have to appoint a guarding to oversee the handling of these assets until the child reaches the age of majority (usually 18). Then, your children will receive the assets as one lump sum at still a very young age.
A better approach would be setting up a trust that names the minor children as the beneficiaries. You would then have a trustee named to oversee the money until YOU have decided when and how they can receive it.
ERROR #4: EX-SPOUSE NAMED AS BENEFICIARY
You were newly married when you started at your company many years ago. What better way to say I love you to your spouse by naming them as beneficiary of your 401k plan.
Fast forward 15 years, you are now divorced from your spouse, but you forgot to change your beneficiary designation…your ex will love you again and your new spouse may want to kill you one more time for such an oversight.
Do you want to avoid the problems I have described here?
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