Estate planning is one of the most important processes you can go through to protect and secure your family’s future. When you purchase life insurance, create a will, set up a trust, or engage in any other legal planning in your personal or business life, you aren’t doing it for yourself. You’re doing it for them.
Your spouse. Your children. Your loved ones. Those that depend on you and those that you would never wish to burden. They are who benefit from your estate plan.
That’s why beneficiary designations are such a critical component of estate planning. It may seem fairly straightforward, but there are a number of mistakes that can be made in beneficiary designations on every type of asset from an insurance policy to a will.
At NC Planning, we want to ensure not only that your wishes are fully carried out, but also that your beneficiaries are not met with friction, complication, or unnecessary expense when the time comes for them to receive the benefits that you have entitled to them.
Here are a few of the top mistakes we help our clients avoid when setting up beneficiary designations.
- Not naming a contingent beneficiary. A primary beneficiary should be named in your policies and documents but you should also have a contingent beneficiary in place. Revisiting your estate plan regularly is something we recommend because over time you may need to change the beneficiary for a number of reasons. But we all know that unexpected things happen. In the event that your primary beneficiary is no longer an option, you want to be the one who determines who receives the benefit instead.
- Designating an irrevocable beneficiary without careful consideration. In some documents and policies, beneficiaries can be designated as “revocable” or “irrevocable.” If you name someone as an irrevocable beneficiary, you essentially revoke your right to make changes to that designation without that beneficiary’s consent. This designation should therefore be carefully considered. An estate planning attorney will be able to explain all of the considerations that may come into play with this type of designation so you can make a well-informed decision.
- Naming only one of your children or a minor child as your beneficiary. The topic of designating a minor child as a beneficiary comes up frequently with clients who are unmarried parents or have decided with their spouse that they want their children to receive the benefit over one another. The intent here is clearly a good one but minors cannot legally receive benefits directly in many cases. However, there are many ways to secure this benefit for your children, all of which can be considered with the help of your estate planning attorney. Along the same lines, some people choose to designate one of their multiple children as a beneficiary. The expectation here is that the children will split the benefit equally among them. Although they may carry that out as intended, it can have tax implications to the individual designated child, who would bear the sole tax burden. (See number five below for more about taxes related to beneficiaries.)
- Naming a special needs loved one as your beneficiary. If you have a loved one with special needs, you naturally want to secure their care and well-being for their lifetime. One of the mistakes people make in setting up a special needs loved one as a beneficiary is failing to account for any financial support that loved one is entitled to from the government. Your special needs loved one could become ineligible for government-funded programs upon receipt of their direct benefit. A qualified estate planning attorney with expertise in special needs planning will know how to avoid this mistake.
- Not considering tax implications. The tax code is incredibly complicated. One of the mistakes people can make when setting up beneficiary designations is to not consider any and all tax implications that could result from a benefit being executed. Expert estate planners have the knowledge and experience to reveal some of these lesser-known tax considerations so that you can set up your beneficiary designations to the greatest advantage.
Failing to plan in the most comprehensive and thoughtful way doesn’t always impact you. It impacts the ones you love and those that rely on you. This responsibility is at the heart of estate planning…this desire to make things easier for those who matter most.
That is what we can help you do at NC Planning. Do you have a question about your beneficiary designations? We can help you uncover potential mistakes and ensure things are set up in the best way possible. It all starts with a conversation. Book a call today.
