When we begin new client engagements, one of the first things we review is whom our clients have chosen as their primary and contingent beneficiaries on life insurance policies, qualified plans and IRAs. There have been many occasions that we discover a serious mistake or oversight during this process.
One of the easiest and most impactful financial planning “to do” items that can be checked off your list is reassessing beneficiary designations. We normally suggest that you perform a “beneficiary audit” at least every 3 years, or when there are changes in your family dynamic (birth, death, marriage, divorce, etc.).
It is important to keep in mind that when discussing beneficiary designations, we are generally referring to those accounts or insurance policies in which beneficiaries can be named directly. These primarily include qualified plans (401(k)/403(b) plans), IRAs and life insurance policies.
Here are few of the more common mistakes that people make:
- Not naming a beneficiary at all.
- Naming an “estate” as beneficiary.
- Naming an ex-husband or ex-wife as beneficiary.
- Listing a parent as beneficiary after getting married and having children.
- Not having a contingent or secondary beneficiary.
- Naming a minor (or even a young adult) directly as a beneficiary instead of a trust for their benefit.
- Designating a trust that does not exist or is outdated as beneficiary.
Reviewing and updating beneficiary designations is a painless and quick exercise that can make a huge difference in creating the most efficient distribution of your assets to heirs.
Because there are tax, legal and other logistical issues to consider, it is important that you choose your beneficiary designations strategically and in the context of your entire estate plan. A qualified financial advisor or attorney could provide valuable insight in this area.