“Beneficiary designations that are inconsistent with your will can wreak havoc on a well-structured estate plan,” said Helen Modly, a wealth manager and Executive Vice President at Focus Wealth Management in Middleburg, Va.
What is the top estate planning mistake you can make? Keeping things up-to-date, especially those beneficiaries! An article titled "Don’t make the No. 1 estate-planning goof" from MarketWatch lists six reasons you might need to update your beneficiary designations:
- You actually completed new estate planning documents. This one is not really in the article but I have added it because clients often tell their counsel they will implement beneficiary designation language designed to coordinate with their estate planning documents, and then do not. This can be a fatal mistake
- You got divorced or remarried. There are some jurisdictions that will automatically eliminate former spouses as beneficiaries; however, there are others that don’t. You should see your estate planning attorney to find out the law in your state.
- You changed jobs and rolled over your retirement plan. What happens when you transfer your money from your former employer’s retirement plan into your new one or into an IRA? Your beneficiaries may lose any claim to those assets. You need to make sure that they are named as beneficiaries on the new account.
- Your primary beneficiary died. You need to update your designation. If you also named a secondary beneficiary, he or she will move to the primary, but now you’ll need to name a new secondary beneficiary.
- Your financial institution changed ownership. It's happened: when a bank, a brokerage firm, or mutual funds merge, they have been known to sometimes drop the beneficiary designations for older accounts.
- You had a child or grandchild. The article cautions not to designate a child under age 18 or 21 (depending on your state) as a beneficiary. If so, the state will appoint a conservator until the child comes of age. You should instead create a trust for his or her benefit and name the trust as the beneficiary if you'd like to give them some of your assets.
- Your beneficiary became disabled. You need to alter the designation or risk jeopardizing the beneficiary’s eligibility for Social Security’s Supplemental Security Income (SSI) benefits. Set up a Special Needs Trust for the benefit of the disabled person and designate the trust as the beneficiary on your accounts.
Review your beneficiary designations routinely!
Reference: MarketWatch, Jan. 23, 2014: "Don’t make the No. 1 estate-planning goof"