Perhaps the better title of this piece would be: The Drawbacks of Incorrectly Naming Beneficiaries. Naming beneficiaries is a very helpful way to pass property to loved ones. However, not keeping beneficiary designation forms or beneficiaries named in a will up to date can cause more difficulty than ease.
What Is a Beneficiary?
Beneficiaries are individuals who you select to receive money, various other assets, or specific bequests (such as sentimental items) upon your death. You can name these individuals in estate planning documents such as a will or in various beneficiary designation forms provided by the plan administrator of a particular asset (such as a retirement account or a life insurance policy).
Outdated Beneficiary Choices
The most common disadvantage is failing to review beneficiary choices regularly to assess whether they still meet your requirements or adjust to any changes that have occurred in your life. For example, perhaps you designated your spouse as the primary beneficiary of your retirement accounts and other non-probate assets. However, if you go through a divorce and forget to change these designations, your ex-spouse could still end up with a significant portion of these assets.
Another example may be where new relationships develop that did not exist when you initially made beneficiary designations. For example, you have had more children or remarried. Should you fail to update your estate plan, you may inadvertently omit these loved ones from receiving a share of these assets when you really would have wanted them to receive something.
Failure to Name a Contingent Beneficiary
A related issue is failing to name secondary or contingent beneficiaries. What happens if you do not have a “backup” beneficiary? One of the main disadvantages is that an asset that could typically pass directly to persons outside of probate may now become an asset that has to be addressed through the probate process. This can create a long delay before those assets get to your loved ones.
Disadvantages can also arise if you name a minor as a beneficiary and that person is still a minor when you die. If this happens, an insurance company or retirement administrator (for example) may not have a way to handle the situation. It would be unable to distribute the funds until it receives directions from a court, or the minor reaches the age of majority (age 18 in most states).
Risks for Individuals Who Rely on Government Benefits
If your named beneficiary depends on government benefits at the time of your death, they could lose their benefits despite your best intentions. This is because certain public assistance programs require their enrollees to have specific income or asset limits.
A better alternative is to leave assets to a loved one who could be in this position through a supplemental needs trust.
This type of trust allows them to receive the assets without losing their eligibility for these programs. The trust also allows the assets to be used for the benefit of the beneficiary while still preserving the government benefits. Additionally, it can ensure that the assets are managed appropriately and used for the beneficiary’s care.
Another consideration is that sometimes naming a beneficiary can convert an asset that was free from the reach of your creditors into an asset that is suddenly available to them.
For example, if a person names their estate as a beneficiary of their life insurance policy, not only does this put the asset into the jurisdiction of the probate court, but it also subjects the funds to your creditors and may be used very differently from what you had in mind. The funds may be used to pay off creditors or taxes owed by your estate.
Consult With an Expert
It is important to remember that as you're creating or updating any estate plan, you need to review all of your beneficiaries (both named in the will and outside of it) to ensure your property is going where you intend. For example, creating a will does not automatically direct your life insurnace benefits. Everybody's planning goals and situations are different. At Linville Law Office, PLLC, we understand your estate plan involves more than a stack of documents you sign, and we will consult with you every step of the way to ensure your planning goals are met. We are conveniently located in south Charlotte for in-office or virtual visits.