One do-it-yourself estate planning strategy is to make beneficiary designations on your bank accounts. The benefit of beneficiary designated accounts is that they go to whom you name at the time of your death with little more than a death certificate and proof of identification. This is an option that is often implemented to avoid probate.
In our firm, we believe that the Revocable Living Trust is the most complete estate planning strategy there is. That may involve making beneficiary designations on certain accounts, however, our reasoning for utilizing this option varies.
Here are some tips to effective estate planning where beneficiary designations are used:
1) Be careful making a minor a beneficiary- a minor cannot be given money outright and the parent is not automatically entitled to receive the money. A guardianship proceeding may need to be initiated, which can be both time consuming and expensive
2) Also keep in mind that a beneficiary of an account or life insurance policy receives the money outright with no limitation. That means that even an 18 year old can receive $500,000 no questions asked, and is that really what was intended?
3) IRA’s, 401K’s, annuities, TSP’s, all have special designation considerations, especially for a married person. Consult with a professional before making these beneficiary designations
4) Make sure that your beneficiary designations are current- they should be reviewed after any significant change; such as death, divorce or marriage and disability. We see it all the time; a couple divorces and forgets to change their beneficiary designations on their policy or account and guess who gets the money when that person dies? You got it, the ex. The important thing to remember is that beneficiary designation usually trumps everything.
5) Naming a beneficiary with a disability or special needs can have unintended consequences. Your “gift” can disqualify them from receiving government benefits.
6) What happens if you do not have a beneficiary named or you name your estate? Some people think by naming your estate that that means it will go to your heirs that way and you won’t have to worry about naming someone or making changes as mentioned, but you’ve caused the money to be subject to creditor claims. So the money that your beneficiaries would’ve received if designated, may now be diminished by your debt.
The bottom line is, be careful of the pitfalls of beneficiary designations or planning without professional advice or supervision.
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