Broker Check
4 Common Mistakes While Naming Beneficiaries

4 Common Mistakes While Naming Beneficiaries

September 13, 2023

4 Common Mistakes While Naming Beneficiaries

It’s not uncommon for people to assume that having a will in place is enough to ensure their assets will pass to their named beneficiaries in the manner they desire. However, certain financial assets—including 401(k) and IRA retirement accounts and life insurance policies—bypass a will or trust’s probate process, with assets instead going directly to the beneficiaries named on the respective accounts. This means you’ll need to carefully coordinate your beneficiary designations with your overall estate plan.

Some of the most common missteps people make regarding beneficiary designations include:

  • Not naming a beneficiary. If a beneficiary is not named at the time of your passing, the proceeds of the account will go to your estate, which doesn’t take full advantage of one of the benefits of these kind of accounts.  If the funds go to an estate, loved ones will have to work with probate court to set it up which they may not have had to do otherwise.  Setting up an estate can be time consuming and could result in the money being tied up which can be challenging when there is an immediate financial need.  If you don’t plan to leave assets to any individual, consider designating a charity or non-profit as your beneficiary. 
  • Forgetting to update named beneficiaries in the event of divorce or other major life event. If your previous spouse is still listed as the beneficiary on your retirement account or life insurance policy at the time of your death, the assets will go to your ex, regardless of whether they are a named beneficiary in your will. Be careful with this though, as some divorce agreements require the ex-spouse to remain beneficiary on an account or policy. 
  • Naming minor children as beneficiaries or contingent beneficiaries. If you and your spouse predecease your children, they could directly inherit large sums of money from retirement accounts or life insurance policies—assets that aren’t governed by stipulations you may have included in your will or trust documents. Avoid leaving assets to minors outright. If you do, a court will appoint someone to look after the funds, which can be a time consuming and expensive process. Consider instead naming the person who would take care of the kids. 
  • Using beneficiary forms that don't allow your assets to pass "per stirpes," or equally among the branches of a family. For example, let’s say you name your three adult children as the beneficiaries of your IRA. If one of them predeceases you, you might want that child's share to go to their children (your grandchildren). However, many standard beneficiary forms don’t include per stirpes provisions and only allow per capita provisions where your two remaining adult children would share the assets. In certain cases, you can ask to include non-standard language to the beneficiary form, but make sure the financial services company has the capabilities in place to manage per stirpes distributions first.

If you have questions or would like help with beneficiary planning, don’t hesitate to get in touch.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice.