Beneficiary Mistakes!

By Max ValaVanis 321-956-7072

As a financial advisor, I witness a multitude of client mistakes. Usually, they are rectifiable, but sometimes it’s too late, and a disaster occurs. The most notorious shortcoming of an estate plan is inaccurate beneficiaries.

Therefore, I’ve outlined five common blunders when naming a beneficiary of life insurance, annuities, or even IRA accounts. Thankfully, these mistakes are easily repairable if addressed promptly and with the right guidance. If any of these mistakes were potentially made by either you or your advisor, please give us a call. We offer free portfolio reviews with no obligation.

Mistake #1: Failure to remove a deceased or an ex-spouse as a beneficiary. At first, this may appear too obvious or unlikely, but unfortunately, it comes across my desk far too often. When a spouse passes away, you should adjust your beneficiaries promptly. This allows the owner to reorganize their beneficiary designations in a way that properly reflects the new situation. Moreover, when an ex-spouse is a beneficiary, we recommend acting swiftly to correct this potential accident. Account owners usually do not feel comfortable with an ex as their primary beneficiary, and often forget to change this designation. In place of them, children or a new spouse may be more acceptable. 

Mistake #2: Naming the estate as a beneficiary of life insurance. Although this error is uncommon, it may seriously impair the liquidity of an estate. When the policy’s beneficiary is the estate, the life insurance may have to travel through cumbersome probate. This court proceeding typically takes 3-6 months to complete and completely locks up the estate’s assets. In Florida, Statute 222, par. 14, states that life insurance proceeds are untouchable by creditors of the beneficiary, but the beneficiary must be a living person and a resident of Florida. Adding a living person as the policy’s beneficiary is an easy way to add liquidity to an estate.

Mistake #3: Failure to name a contingent beneficiary. If you can appoint a primary beneficiary, you can almost always appoint a contingent. In the horrible event, your primary beneficiary dies before or with you, you must have a Plan B. If this disaster occurs and no contingent beneficiary is in place, the proceeds will revert to the estate. As mentioned above in Mistake #2, this creates another problem.

Mistake #4: Naming a trust as the beneficiary of an IRA. A beautiful aspect of an IRA is that a spouse beneficiary can own the IRA, in their name, tax-deferred for their lifetime. Additionally, a non-spouse beneficiary can opt for a ten-year payout, where the account value must be completely withdrawn in that period. When a Living Trust is named as beneficiary, these features are negated. Unless the trust was specifically drafted to inherit IRAs, the full amount of the IRA distribution may be taxable for that year. Unless you have specific reasons, don’t designate a Living Trust as the beneficiary.

Mistake #5: Naming a minor child as a beneficiary to life insurance or annuity. Life insurance companies do not pay cash to minors. As a result, a guardian, custodian, or trustee must be appointed to handle the proceeds. This process can be costly and a nuisance. Minor children are not legally allowed to own anything unless allowed by their state of residence. Naming a trust as the beneficiary for the benefit of the minor or utilizing your state’s Uniform Transfer to Minors Act (UTMA) are better avenues to transfer assets to minors. UTMA was an act drafted and recommended by the National Conference of Commissioners on Uniform State Laws in 1986 and subsequently enacted by most U.S. States. It provides a mechanism to transfer money to a minor without the required presence of an appointed guardian. You can open an UTMA account almost anywhere!

Max ValaVanis is a co-owner of Valavanis Financial in downtown Melbourne and in Rockledge. Max specializes in lifetime income planning for Retirees while protecting principal. Max can be reached at 321-956-7072.