5 mistakes to avoid when naming beneficiaries

If you’ve ever spent time working through your estate plan with a professional, you know how important it is to select and update your beneficiaries. Failing to do so can result in costly mistakes — for you and your loved ones. Here are five common mistakes that can easily be avoided with a bit of proactive planning:

Mistake No. 1 — Not naming a beneficiary on all accounts.

Ensure you have beneficiary designations on all of your retirement, investment and banking accounts, as well as your insurance policies. If you don’t name a beneficiary on one or more accounts, your estate becomes the beneficiary of that account and your loved ones will need to go through the probate process (a legal process most families want to avoid for financial and emotional reasons). If this happens, your relative can lose their ability to use “stretch” payouts based on their life expectancy because the taxadvantaged status for retirement assets is lost.

Mistake No. 2 — Forgetting to name a contingent beneficiary on all accounts.

Many people list the same loved one — usually a partner or parent — as the primary beneficiary on most or all accounts. If this is how you’ve handled your assets, it is important for you to also name a contingent beneficiary. This is because if your primary beneficiary passes away first and no contingent beneficiaries are listed, it’s comparable to having no beneficiary designation. If you both die at the same time, funds go into probate.

Naming contingent beneficiaries also gives the primary beneficiary the option to execute a qualified disclaimer so some assets can pass to next-in-line loved ones. For example, a primary beneficiary may not wish to claim the assets because of tax implications or because they don’t need the assets and prefer instead to pass your gift onto another beneficiary.

Mistake No. 3 — Not using specific names.

One mistake many people make is listing a generic term — such as children, parents or aunts — instead of specific names in their beneficiary selections. This can be problematic, especially if you are part of a blended family. Many states won’t include or recognize stepchildren when the word “children” is listed. Another risk of vagueness is that a family member you’ve lost contact with may enter the picture and try to claim a piece of your remaining assets. With this in mind, make sure you use full names of each person when naming beneficiaries.

Bronwyn Martin