The naming of beneficiaries for retirement accounts and life insurance policies seems a fairly straightforward process.
However, the changes that occur in life may affect the beneficiary designations you have made, or in some cases, have not made. Here are five mistakes to avoid:
1. Not keeping beneficiary designations current
If you divorce and remarry, you must remember to change your beneficiary designations. If, for example, you die and your ex is the beneficiary of your life insurance policy, the company holding the policy could potentially distribute the proceeds directly to him or her.
2. Naming a minor as a direct beneficiary
If you name a minor child as the beneficiary of your life insurance policy, the company will probably distribute the proceeds when the child turns 18. Instead, youÂ may want toÂ consider establishing a testamentary trustÂ on your child’s behalf.Â Whomever you name as trustee manages the assets until the recipient of the proceeds reaches an age at which you believe that he or she will deal with the funds wisely.
3. Naming a special needs person as a direct beneficiary
If you name someone with special needs as a direct beneficiary, you may unintentionally block him or her from receiving essential government benefits. Creating a special needs trust is a good way to keep this from happening.
4. Naming a beneficiary who is financially irresponsible
You want to be certain that a loved one whom you know is financially irresponsible will not spend an inheritance on drugs, gambling or some other addiction. Here, again, you can establish a trust for the benefit of this person. A â€œspendthrift trustâ€ willÂ act as an advantage for your loved one while protecting the funds from creditors and possible litigation.
5. Not naming beneficiaries at all
Perhaps you have not yet prepared your will or given full consideration to the estate planning tools that can help you manage the naming or renaming of beneficiaries. Remembering the mistakes to avoid can make dealing with beneficiary designations a much easier task.