Mistakes in Beneficiary Designations

Asset Protection

Beneficiary designations are an important tool in estate planning – one must always remember that their terms trump the distributions provided in a decedent’s Will. Retirement accounts, life insurance, and other assets offer owners the power to entitle individuals to these assets upon the owner’s death. Errors could cost a surviving family member their expected share of a loved one’s estate, pass assets to an unintended party, incite family conflict, or cause unnecessary tax burdens for beneficiaries.
With regular estate planning reviews a mistake with beneficiary designations can often be avoided or corrected. Here our estate planning lawyers in Chapel Hill explain a few mistakes and their consequences:
  • Not naming a trust as a beneficiary. When an individual wants to protect funds left to a loved one, a trust can be created and designated as the beneficiary. The trust’s terms will provide how and when distributions can be made to the trust beneficiary.
  • No contingency provisions. If a beneficiary passes away before your death, how will the asset be distributed? If secondary beneficiaries have not been assigned, depending on the asset, probate may be the result. This means the assets will be distributed according to the Will, if any, otherwise in accordance with North Carolina state intestacy law—and this may cost a significant amount of time and expenses and result in unintended persons receiving the funds. Additionally, this could create additional tax for those who inherit retirement accounts. A retirement account that passes on (through the probate estate) to persons who have not been designated as beneficiaries must normally be withdrawn and taxes paid on it much sooner than if individuals were formally designated beneficiaries. Individuals who are designated beneficiaries on IRAs can stretch withdrawals over their lifetime, realizing tax-deferred growth and minimizing taxes.
  • Not updating documents after marriage or divorce. Marriage, divorce and re-marriage are all life changes that should signal persons to not only review their estate plans, but update their beneficiary designations. Failing to update beneficiaries could legally entitle a former spouse to a retirement account or life insurance, and leave a current spouse with nothing.
Beneficiary designations are also important in estate planning for same-sex couples in North Carolina as they are not entitled to any marital rights under state law, including inheritance. Need more reasons why you need to update your beneficiaries? Follow the link.
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