Don’t Make Bad Beneficiary Designations (Part 1 of 3)

Most people understand the importance of having a will or trust to dispose of property at death. They carefully consider the options and decisions that must be made in the will or trust and devote much time and energy to making sure their wishes are stated in the documents.

But many people are not as careful concerning beneficiary designations made on life insurance policies, retirement accounts and other assets. In some cases, they simply do not understand the consequences of the beneficiary designations. In others, they may realize that beneficiary designations should be changed but never take the steps to change them.

There are three common mistakes – each of which can have a huge impact on an estate – when designating a beneficiary. In this three-part series, starting with Mistake No. 1, we’ll take a close look at each common mistake.

Mistake No. 1 – Naming an individual as beneficiary of life insurance policies.

A life insurance policy is a contract between the policy owner and the insurance provider. The policy owner has the right to name a beneficiary of the policy. When the owner dies, the provider must pay benefits to the named beneficiary according to the rules of the contract, even if the owner’s will or trust says otherwise.

Estate planning in a will or trust often anticipates that life insurance proceeds will be available to pay debts, taxes, and expenses. Estate plans often use insurance proceeds to fund trusts designed to minimize death taxes or manage inheritance for disable or young beneficiaries. These can be some of the most important aspects of the estate plan.

If the contract requires the life insurance proceeds to be paid directly to an individual as the named beneficiary, then the proceeds do not pass under the will or trust and cannot be used to make the payments or fund the trusts described above. This can effectively undo otherwise careful and good estate planning.

Solution: Consider naming your estate or trust as the beneficiary of your life insurance policies, rather than naming an individual person as the beneficiary.

Follow your curiosity to Mistake No. 2.

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