A beneficiary is the person or people who receives the benefit of any life insurance, IRA, Annuity or 401k Plan when you die.
However, there are several common mistakes people make when setting these up. For most people, the naming of a beneficiary was set up many years, if not decades ago. Most people never think about who they have named as beneficiary and probably can’t remember their beneficiaries, if they had to.
Oftentimes, a large percentage of someone’s estate is transferred, by beneficiary designations. I want to make sure that you are not making these common errors.
If no one is named as a beneficiary, then that asset gets payable to your estate. What’s the problem with that? First problem is that the asset is now is part of your estate and subject to any claim by creditors.
Secondly, let’s say that you have very modest assets under $50,000.00, but you have a $250,000.00 life insurance policy. Normally, upon your death, your estate would not have to be probated due to its small size. But because no one was named as beneficiary on the life insurance policy, your estate must now be probated. This will cost your estate a lot of money and time.
Your filled-out forms at the HR department when you are started at your company 25 years ago. Back then, you were single, so you named your parents as beneficiaries under your 401k plan and the life insurance you company provides.
Well things have changed in 25 years. Your parents are nearing 80. Do you want those assets to end up with your parents? These funds may be eaten up by medical and nursing home expenses?
Even worse, you are now married with 2 children and a dog. Certainly, you would prefer your life insurance, 401K and other benefits to benefit your family first.
Normally, the company handing your 401k plan, or the life insurance company will not send out check payable to minor children. That means a court would have to appoint a guarding to oversee the handling of these assets until the child reaches the age of maturity (usually 18).
A better approach would be, that we set up a trust that names the minor children as the beneficiaries. You then have a trustee named to oversee the money until the children are of an appropriate age to manage their own money. We recommend ages between 25 and 35.
You were newly married when you started at your company many years ago. What better way to say I love you to your spouse, but by naming her as beneficiary of your 401k plan.
Fast forward 15 years, you have now been divorced from your ex-wife for 8 years, but you forgot to change your beneficiary. Oops. Your ex-wife will love you and your new wife will want to kill you. It is time to sit down and review all of your assets and the named beneficiaries on those assets.