Avoiding Costly Mistakes in Designating a Beneficiary

Do you have life insurance, an IRA, Deferred Compensation Plan, or any other type of retirement account?  If so, have you named a beneficiary of these accounts in the event of your death?  If you answered “yes” to both of these questions, when was the last time you reviewed your beneficiary designations?
    
As part of a general estate planning process, you should review your beneficiary designations on a regular basis – at least once every year, or upon the occurrence of a life changing event.
    
Among other things, a life changing event can be defined as a marriage, divorce, the birth of  a child, a death in the family, or a job change.
    
Unfortunately, often times, individuals neglect to change their named beneficiary to reflect their current wishes.
    
As you may know, upon death, retirement accounts and life insurance policies pay the entire amounts to the person currently on file designated as your beneficiary.  This is true regardless of whether or not you have a valid will or trust.  In other words, regardless of whom your will or trust directs your property to, your retirement plans and life insurance will pay to the most recent beneficiary(ies) named by you in writing and submitted to the retirement plan administrator or life insurance company.
    
In light of the above, it is important to ensure that the beneficiary designation submitted by you is updated to reflect your most recent desires.
    
As an example, sometimes, when a person gets married, he or she forgets to update the beneficiary designation to name the new spouse as beneficiary.  In this circumstance, failure to update the designation may result in unintended consequences.  Additionally, sometimes a person will name a minor child as a beneficiary.  When this happens, most retirement plans and life insurance companies will not pay the money directly to the minor child.  Rather, they will generally require that a court name a guardian for the minor child to manage the money until the child turns eighteen years of age.

Knowing this, sometimes a person will name a trusted friend or relative as the beneficiary, with the understanding and hope that this individual will use the money for the child or children.  Unfortunately, this is very risky for several reasons.  First, this trusted friend or relative is under no legal obligation to use the proceeds for the child.  Secondly, once received, these funds may be used to satisfy any creditors or monetary judgments of the trusted friend or relative.  With appropriate planning, there are legal ways to ensure that these funds are available and used for the benefit of a minor child, while eliminating the above risks.

It takes very little effort and time to check and review your current beneficiary designations.  By regularly reviewing your designations, you can ensure that your hard-earned money will go to the intended recipients in the event of your demise.

    



Bradley S. Erdosi is an attorney practicing in the areas of estate planning and probate and is also a preferred vendor for the Riverside Sheriffs’ Association.  For additional information, please contact him at www.willsandtrustslaw.com or by telephone at (949) 261-5777.
Special note:
This article is intended only for the purpose of providing general information and does not constitute legal advice.  By providing the information contained in this article, no attorney-client relationship is established and nothing contained in this article should be construed to necessarily be applicable to your unique situation.  You should always engage the services of an attorney to determine which, if any, legal solutions are right for you.