Common Mistakes When Designating a Beneficiary

life insuranceMy Comments: With so many of us getting older, there is an increasing focus on what happens to our money when we die. If we don’t pay attention, large pieces of it may flow to the IRS and into the hands of others simply because we couldn’t be bothered to get it right the first time.

It’s not just retirement accounts and life insurance policies anymore either. I have a number of clients who have identified their non-retirement money as TOD accounts. This stands for Transfer on Death, and its a way to cause regular accounts to be distributed to beneficiaries when the account owner(s) die. It avoids probate and can be changed by the owner(s) at any time before you meet your maker. Of course, this assumes you are considered competent and not just a little goofy.

But whether it’s a TOD form or typical beneficiary designation, if mistakes happen, someone may have a problem later on when you can’t fix it by signing a new form. At this point, you may be gone.

Legal and financial professionals were recently polled and asked to list the most common mistakes that individuals make when completing their beneficiary designations. Here are the top five mistakes:

1. Failing to sign and date the Beneficiary Designation form.

2. The percentages listed next to the various beneficiaries did not total 100%.

3. Attempting to update their designations through wills, incorrectly believing that their wills will override their existing beneficiary designations.

4. A false belief that a divorce or property settlement automatically removes their former spouse as a designated beneficiary.

5. Forgetting to update their beneficiary designations when a major life event occur (eg., birth, adoption, marriage, divorce, or death).

As a general rule, it’s wise for clients to conduct an annual review of their beneficiary designations. For employees, open enrollment is oftentimes an appropriate reminder. Individuals should also back up their beneficiary designations electronically. Finally, if there is a future challenge to a beneficiary designation upon an individual’s death, it’s typically wise to retain former beneficiary designations.