Many people believe that when they finish drafting their wills that their estate planning needs are complete. However, there are a growing number of assets that people are accruing that require beneficiary designation forms, meaning that these assets transfer to the person named on the designation form outside of the probate process through which a person's will passes. The named beneficiary form takes precedence over a will on these assets. It is important for people to coordinate such documents with their wills when making their estate plans and to consider carefully whom they select as beneficiaries for their assets.
Types of Assets with Named Beneficiary Forms
The most common types of assets requiring named beneficiary designations include:
- Retirement accounts such as IRAs, pensions and 401(k)s
- Life insurance policies
- Payable or transferable on death bank accounts
- U.S. Savings Bonds
- Securities such as stocks and bonds
Common Mistakes to Avoid with Named Beneficiary Forms
With a little vigilance, a person can avoid these common mistakes when dealing with named beneficiary forms:
- Failing to update the forms after major life events such as marriages, divorces, births and deaths so as to ensure that an intended heir is not omitted or prevent someone to whom a person no longer wants to leave any assets from receive anything
- Failing to name new beneficiaries when rolling over funds from an old account into a new account, as the beneficiary forms from the old account do not follow the funds
- Not naming a secondary beneficiary in the event that the first beneficiary dies before the asset holder and cannot collect the asset
- Naming minors as beneficiaries instead of setting up a trust to receive the funds on minors' behalf, as minors can only inherit limited amounts of money
- Naming a person's estate as the beneficiary on an IRA, as doing so makes the asset pass through probate and means that the heirs incur higher income and capital gains tax penalties on those funds than if the asset had transferred to them through a beneficiary form
It is important for people to coordinate all of their assets into one comprehensive estate plan. If you have not made an estate plan or have not updated your plan recently, seek the guidance of an experienced estate planning attorney who can review your situation with you and advise you of your options.
