Most Americans spend a lifetime accumulating assets to provide for their families. Most want to leave assets to their children but there is one problem.
Many investors fail to regularly update their beneficiary designations therefore they run the risk of leaving life insurance proceeds, IRAs or 401(k) s to ex-spouses or family members that at one time they wanted them to receive but no longer.
But, you may wonder what are some mistakes to avoid when naming beneficiaries?
Mistakes to avoid when naming beneficiaries
A beneficiary designation is one form of estate planning. It allows you to transfer certain assets, such as proceeds from a life insurance policy or a retirement plan (IRA, 401(k), 403(b)) without going through the probate process. The person or entity you choose to receive the proceeds is called the beneficiary. If you’re single, you can choose anyone you wish as your beneficiary. If you are married, the law may restrict your choice. You can also name a charitable institution, your estate, or a trust as the beneficiary of many retirement plans.
Let’s focus on three primary assets many of you may own: life insurance, 401(k)s and IRAs.
1. Life Insurance
- Who can be your beneficiary? You can name anyone you wish with one exception. Many people choose a family member such as a surviving spouse or child. You can also name a charitable institution or a trust. Remember, life insurance proceeds to your beneficiary are not taxable to the recipient.
- Who can you not name as a beneficiary? You may not name your employer as the beneficiary of group life insurance.
- Who can be your beneficiary? Some retirement plans require you to name your spouse as the beneficiary, unless he or she signs a notarized written waiver consenting to your choice of another beneficiary. Most attorneys agree a prenuptial agreement cannot take the place of a waiver because the law requires your spouse, not your intended spouse to sign. You can also name your child as beneficiary but keep in mind that if your child is a minor you should also appoint an adult to act as guardian of the money.
- Who can be your beneficiary?: The same rules apply as the life insurance, meaning you can name anyone but if the beneficiary is someone other than your spouse, you may be required to have your spouse sign a waiver.
- Who should you not name as your beneficiary? A common error I see is naming a living trust as a beneficiary. There are only a few trusts that have the necessary provisions that make this beneficiary designations work properly. Check with your estate planning attorney and ask if your trust has the proper verbiage. If it does not, your estate may be required to withdrawal your entire IRA within five years of your death, potentially creating a large tax liability.
As you have learned, naming beneficiaries requires a lot of thought. Remember this also: If you have a life changing event such as a marriage, divorce, birth or death, update your beneficiaries. Lastly, once a year review, all of your accounts that require a beneficiary designation so that you are assured that the person who is going to receive your money is the person you WANT.
Jon Sanchez is a registered representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment adviser. Are you ready to build a portfolio that meets your goal? Meet with Reno’s premier financial adviser, Jon Sanchez. Contact (775) 800-1801 or visit www.sanchezwealthmanagement.com to learn how our team can serve you.
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