Naming beneficiaries usually goes well. But a few mistakes could delay your money being transferred, or simply send it to the wrong place. Thankfully, they’re not too hard to avoid. Here are thirteen of the biggest mistakes to watch out for when naming beneficiaries, based on information from reputable sources we collected (see sources at end). Which of these were you aware of already?
Just remember, this is not legal or financial advice & you should always see an expert before making any important decisions.
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Don’t assume your will controls the accounts
A lot of people think their will controls everything. But no. Your brokerage account may have a transfer-on-death form, and this form wins every time, even when you have something completely different written in your will. The custodian is going to honor the paperwork that’s on file with them instead of your lawyer’s version.
Don’t skip spousal consent on a 401(k)
Federal law usually makes your spouse the automatic beneficiary on your workplace plan. That means that when you want to name someone else, your spouse has to literally sign off. They may even need to do so in front of a notary. Skipping that step could mean the company plan pays your spouse anyway, no matter what your form says.
Don’t name your estate on an IRA unless you mean to
While it sounds simple, naming your estate could change everything. The IRS doesn’t consider an estate a designated beneficiary, and that means that the payout rules are harsher. Rather than stretching distributions, the account might have to be drained in five years, depending on when you pass.
Don’t list a minor child outright without a plan
Kids can’t simply cash a retirement check at age 10. As such, naming a minor directly could force the court to step in and appoint someone to handle it, leading to lawyers & delays. Setting up a trust or using a custodial arrangement could help you avoid this circus.
Don’t count on a divorce decree to change a 401(k) form
Unfortunately, so many people overestimate the power of a divorce decree, and they assume it’ll change their 401(k) form. But even when your divorce papers say the ex doesn’t get a dime, they could still collect if you left their name on your retirement plan form. The plan administrator won’t dig through your court documents. They’ll simply go by the beneficiary card they have.
Don’t nickname a charity on bank records
Banks aren’t detectives, and they won’t know who to pay when you tell them to donate to a “local food bank.” Charities have to be listed with their full legal name & maybe even their tax ID. Without this information, the bank can’t match the name exactly, so the money may be stalled. Or worse, it won’t go where you meant for it to.
Don’t skip “per stirpe” or “per capita” instructions
Those little boxes on the form matter more than you might realize. “Per stirpe” means that if your child passes first, their kids inherit their slice. “Per capita” means the surviving named people split it, so it’s not something you want to mix up. Doing so could mean that your money is divided in ways you didn’t picture at all.
Don’t ignore community property rights
Living in a community property state could mean that half the money you have in your accounts legally belongs to your spouse. That’s the case even when it’s just your name on it. As such, you can’t pick anyone else without their say-so, although rules vary by state, so you may want to double-check before assuming it’s yours alone to give away.
Don’t mix up TOD/POD and separate beneficiary forms
A brokerage may ask for a transfer-on-death form, while a bank uses a payable-on-death form. They’re not the same. Filling out the wrong one, or even thinking that you already did, could mean that the account doesn’t transfer outside probate at all. Each place has its own type of paperwork to fill out, so match the form to the account.
Don’t overlook the special rule for HSA beneficiaries
Health Savings Accounts are rather strange. When your spouse is listed on it, it rolls into their own HSA, but for anybody else, it counts as taxable income in the year you die. That could be a big reduction for whoever inherits it, so planning for non-spouse heirs involves knowing that they’re inheriting a tax bill, too.
Don’t name a trust on an IRA without “see-through” checks
While trusts may be useful, with retirement accounts, the IRS has strict hoops. A trust has to meet see-through requirements for the underlying people to count as beneficiaries, meaning that a failure to qualify could reduce the payouts. You should always confirm the trust language works before writing it down.
Don’t assume inherited IRAs are always creditor-protected
Unfortunately, once someone other than a spouse inherits an IRA, it usually loses its federal bankruptcy shield. That means that creditors can go after it, should the heir ever file for bankruptcy. But don’t worry. You may want to leave it to a trust or spouse instead to avoid risking exposure.
Don’t add conditions or side notes on forms
Beneficiary forms aren’t built for creativity, and any messages like “only if she graduates” or “split this account if” will just get ignored. The system reads names & percentages. Nothing more. Of course, should you want rules or restrictions, you’ll need to include this information in a trust or other estate planning document, rather than in the margins of a beneficiary form.
Sources: Please see here for a complete listing of all sources that were consulted in the preparation of this article.
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