The task of naming beneficiaries is one of the most important stages of estate planning. It ensures that the right people inherit your estate according to you wishes. However, there are a few common mistakes that may derail your plans if you aren't careful. For example, your wishes may not be realized if you:
Fail To Name an Alternate Beneficiary
An alternate beneficiary inherits an account or asset if the primary beneficiary isn't able (meaning they are deceased) to or isn't willing to inherit it. Some people may also disinherit an account, for example, due to a personal grudge with you or if they feel they don't deserve your gifts.
State rules dictate how an account is distributed if it can't go to the primary beneficiary and there isn't an alternate beneficiary. For example, it may go to the primary beneficiary's heirs or pass to the estate and be distributed according to each state's intestacy laws.
This means your assets may go to those you never intended. For example, if you leave something to your child, and they die before inheriting it, it may (depending on state laws) go to their children (your grandchildren). This may be unfortunate, for example, if you wanted your spouse to receive the asset if your child isn't able to. Prevent such confusions by naming alternate beneficiaries for all primary beneficiaries.
Fail To Update Your Beneficiary Designations
You should update your beneficiaries to ensure the right people get your assets, because you never know when you will die. For example, if you divorce without updating your beneficiary designations, your former spouse might still get the assets you designated for them while married; it all depends on state laws. That might be unfortunate if you did not wish for your former spouse to enjoy those assets.
Fail To Name Your Beneficiaries Individually
Some people group their beneficiaries and bequeath them assets as a class without listing the individual names of the beneficiaries. For example, you may leave a piece of real estate to your children or household items to your grandchildren. Unfortunately, failing to name your beneficiaries one by one may present several challenges down the road.
A classic challenge arises if one of the members of the class passes on before they can receive the account. For example, if you leave a piece of real estate to your children as a group, and one of them dies, the deceased child's share of the property may pass to their children (your grandchildren) or the surviving children. Unfortunately, that may be contrary to your wish.
Prevent such problems by naming your heirs individually and naming their alternate beneficiaries individually, too. That way it is clear who gets what for any particular circumstance.
This is one of the reasons people need professional help with their estate planning. An estate planning lawyer is aware of these and other problems and will advise you on the best way of avoiding them.