New York Estate Planning & Elder Law Blog
One of the most common estate planning mistakes comes in the handling of beneficiary designations. Many people do not understand that inheriting retirement accounts, life insurance, and other assets that involve a beneficiary designation are different than inheriting from a will. Here are some of the most common mistakes that occur with beneficiary designations as well as steps that you can take to ensure that the retirement money that has been diligently saved will be passed on to the person you intend.
Common Mistakes in Beneficiary Designations
While many people go to an estate planning attorney for help drafting wills and trusts, most do not rely on their expertise for beneficiary designations. As a result, those that you wished would inherit your retirement accounts and life insurance receive less while creditors, former spouses, and miscellaneous relatives could get it all. Here are some of the most common mistakes and misconceptions that lead to problems with beneficiary designations:
Beneficiary forms must be filed with a custodian.
If the form is not on file with a custodian it does not count. Even if it is filled out completely and accurately by the account holder and sitting on the owner’s desk it does not count. A beneficiary form must be sent to a custodian before the account owner dies.
Beneficiary designations cannot be left blank or name a deceased person.
If you fail to name a beneficiary or name someone that is deceased the financial institution will decide who gets the money. Regardless of the account owner’s wishes, the institution will look to state law and the asset agreement to determine how the account assets are distributed.
An estate does not have a life expectancy.
The required minimum distributions from an inherited account are determined by the beneficiary’s life expectancy. This allows withdrawals to be stretched over time, saving money in taxes and other fees. According to the IRS an estate has no life expectancy, and as a result all money must be withdrawn from the accounts as quickly as possible.
Naming your estate can be worse than naming no beneficiary at all.
Besides the tax downsides of pulling all money from the accounts, naming the estate as beneficiary has other problems. The most important of which is that an estate does not have the same protections as a human beneficiary, and all money that is given to the estate is subject to creditors. In addition, the funds used to pay off the creditors are then subject to income tax, which must also be paid off using the funds from the estate.
Steps to Avoid Beneficiary Designation Mistakes
There are ways to avoid making mistakes in beneficiary designations. Going over all of your estate planning information, including your beneficiary designations, is a good place to start; however, these steps will also help ensure that your retirement and other accounts will go to who it should.
· Name a primary beneficiary · Name an alternative beneficiary in case the primary beneficiary dies before you · Do not name your estate as a beneficiary · Review beneficiary forms once per year to check that they name who you want · Update your forms more often to reflect changes or other life events such as a birth, death, marriage, divorce, or adoption · Every time that you change a form send it to the institution that is holding the account and ask them to acknowledge receipt of the change.