Erik: 00:00

You’re listening to Uncommon Cents, a podcast by Bowman Financial Strategies. I’m your host, Erik Bowman and thank you for joining me today. Hi everyone. Today we’re going to be discussing common beneficiary mistakes and how to prevent them. It is June 20th, 2019. Thanks for joining me today.

Erik: 00:32

Before I get into the common beneficiary mistakes, I thought I might take a moment to briefly give you an overview of some of the principles that we adhere to at Bowman financial strategies when it comes to beneficiary designations. The first thing is that we always want to name at least a primary beneficiary and whenever possible or when it makes sense. We also want to name a contingent beneficiary. The rationale for this really revolves around ensuring that your assets are going to whom you want them to go to after you’ve passed away without interference from the probate courts in the government and potentially contested wills and things like that where what you want to have happen may not actually work out smoothly if you don’t designate it in the original contract or by making an additional beneficiary designation after a contract has already been opened up. This would apply to investment accounts, qualified and non-qualified example of a qualified account would be an IRA or an individual retirement account. And then there’s non-qualified taxable brokerage accounts. Then of course, life insurance policies. All of these, you want to make sure that you have appropriate beneficiary designations.

Erik: 01:51

So the first primary issue is not naming a beneficiary on a life insurance policy or an investment account. Most of our custodians, fidelity and Schwab, for example, when we open up an IRA or a Roth IRA, they actually mandate that you list a primary beneficiary at a minimum before they’ll even open the account. However, for non-qualified accounts, also known as transfer on death accounts, they actually do not require a beneficiary to be named if there is no beneficiary, the investment company or the custodian typically has their method of how they’re going to dispose of those funds upon the death of the account owner. And usually it means it’s going to go to the estate and then you’re going to have the state get involved through probate with probate courts and lawyers cost, time and aggravation. So if you want to ensure that your assets flow through to who you want them to flow to after you’re gone, you want to ensure that you are listing at least a primary beneficiary on all of your accounts.

Erik: 02:57

As an extension of this, first of not naming a beneficiary, as we’ve just discussed, you should always name it primary, but it’s also problematic if you don’t name a contingent beneficiary, a contingent beneficiary as the person who’s going to receive the assets. If the account owner dies and if the primary beneficiary is also no longer alive, then the cash or the assets will flow directly to that contingent beneficiary. Once again, if a husband and wife die in an auto accident to be morbid for a quick moment and the surviving or the spouse, the wife was listed as the beneficiary and they both died in that car accident and if there’s no contingent beneficiary, then once again those assets are going to be subject to probate.

Erik: 03:47

Another issue can run into sometimes, is that with an individual retirement account, what we find is that some people want to name a trust as the beneficiary. The issue with this is that upon the death of the account owner, the assets are going to then be liquidated and pass on to the trust, which is going to create some tax implications that are not usually very beneficial. That doesn’t mean however, that every time you want to have a trust as a beneficiary for an IRA that it’s wrong. There could be an example where we have a single parent and the children are minors and they don’t want to leave $500,000 to a two year old. So you would accept that there are tax consequences and have the beneficiary be the trust. But at least the trust then and through the trustee is going to be able to exercise control over the distribution of those assets.

Erik: 04:40

But in most situations you would want to list your spouse as the beneficiary, which offers the definitive benefit of the IRA simply becomes the account of the surviving spouse. It’s in their name, it doesn’t have any reference to the deceased. And that means all tax deferral applies to the surviving spouse and their age. So for example, if the deceased spouse was older than the surviving spouse, this would delay the required minimum distribution rule so that they don’t have to start taking money out of this IRA until they’re age 70 and a half as opposed to, I’m taking it out based on the age of the deceased.

Erik: 05:27 A third issue with beneficiary designations would be not taking into account special circumstances. Not all loved ones should receive assets directly. These individuals might include minors or individuals with special needs. Individuals with special needs, for example, may be receiving benefits from the state to the State Medicaid program. And if you were to leave them money directly through a beneficiary designation, those assets then would fall into their ownership and therefore into their estate and would be counted against them, if you will, that might prevent them from receiving future valuable government benefits. So you want to evaluate that with an estate planning attorney and determine if potentially a special needs trust or some type of trust might make sense in that case to prevent that person from losing valuable government benefits.

Erik: 06:25

The fourth issue that we often see is not updating beneficiaries over time. Who you want to or should name as a beneficiary will most likely change over time as circumstances change and naming a beneficiary is part of an overall estate plan just as life changes. So should your estate plan. Beneficiary designations are an important part of that overall plan, so you want to make sure that they’re updated regularly.

Erik: 06:54

A final error that people can make when naming a beneficiary is to name the wrong beneficiary. Now this may be unintentional because sometimes the beneficiary section of an application may not ask for a lot of information. It may only ask for a name and if you have multiple people in a family with similar names such as senior junior or the second or third, but the beneficiary designation form doesn’t allow you to be that specific. Well that can cause potential litigation down the road and confusion. So you want to make sure you have the ability potentially through a letter of instruction in addition to the actual application to get very specific about exactly who that person is. Now many times on the application they actually have a place for the social security number and date of birth of the beneficiary. By adding these two pieces of information, you can be assured that the correct person is going to be receiving the benefits should the owner pass away.

Erik: 07:52

So in review, the primary mistakes we see regarding beneficiaries are number one, not naming a beneficiary. Number two would be not taking into account special circumstances when naming a beneficiary. Number three, not updating your beneficiary designations over time. And number four, naming beneficiaries incorrectly, which could lead to some confusion on who actually gets the money. And one of the subcategories that I also discussed was the downside of potentially naming a trust as the beneficiary. You want to make sure you’re doing that with full knowledge of why you’re doing it and the implications. As always, if you have any questions about beneficiary designations, please feel free to reach out to me, Erik Bowman at Bowman Financial Strategies. You can give a call to our office at (303) 222-8034 or you can send me an email at Erik that’s E R I K at Bowman Financial Strategies.com. I appreciate you listening to this podcast today. Please feel free to share it with your friends and I look forward to speaking with you all again soon. Thank you for joining me for Uncommon Cents, the Bowman Financial Strategies financial education series. I’d love to hear your feedback on financial topics. You would like to learn more about. Just drop me an email at erik@bowmanfinancialstrategies.com or go to the Bowman Financial Strategies website and send me a note on our contact page. In addition, you can always search for topics of interest in my archive on our podcast page at www.bowmanfinancialstrategies.com/podcasts have a great day.

Disclosure: 09:30

This communication does not constitute federal tax advice and may not be used as such. Please consult a qualified tax professional for tax advice or assistance. In addition, investment advisory services offered by Change Path, LLC, a registered investment adviser. Change Path and Bowman Financial Strategies are unaffiliated entities.