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A common estate planning mistake occurs with beneficiary designations. If done correctly, the beneficiary designation avoids probate and transfers the asset directly to the beneficiary. If you make a mistake on the beneficiary designation, your plan may be at risk from creditors, former spouses, and miscellaneous relatives who may fight for their share. Following are some common mistakes and misconceptions that lead to problems with beneficiary designations:
If you fail to name a beneficiary or name someone that is deceased, the asset will usually go to probate. If you have a will, the will names the beneficiaries. If you don’t have a will, the state intestacy (what happens if there is no will) law determines the beneficiaries.
Naming your “estate” as a beneficiary on retirement funds is not recommended. When you list your estate as the beneficiary, it means the asset will have to be probated.
A thorough review of all assets, goals and desires is important in a comprehensive elder law estate plan. However, the following recommendations may avoid serious problems with beneficiary designations:
- Name a primary beneficiary.
- Name a contingent beneficiary in case the primary beneficiary dies before you.
- Do not name your estate as a beneficiary.
- Review beneficiary forms at least every three years
- Update your forms to reflect life changes such as a birth, death, marriage or divorce.
- Every time you change a form send it to the institution holding the account and ask them to acknowledge receipt of the change. Keep a copy for yourself.
Keep in mind that beneficiary designations simply avoid probate. They do not keep assets in the bloodline for your grandchildren or protect those assets from long-term care costs. In order to keep assets in the bloodline, an Inheritance Protection Trust (IPT) is used. To protect assets from long-term care costs, a Medicaid Asset Protection Trust (MAPT) is required.
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