Q: My dad apparently never updated his beneficiary designations, and it caused substantial problems after he passed away because one of the beneficiaries had predeceased him. How often should beneficiaries be reviewed?
A: While there is never a bad time to revisit the beneficiary designations you have made over the years, we generally recommend this activity be completed annually. Unfortunately, once various beneficiary forms are completed, they are often forgotten until the time of death. In many cases, executors find that no beneficiaries have been named at all, creating confusion, anger, and time delays in settling an estate. In other cases, the named beneficiaries may no longer be members of the family due to divorce or death.
One of the main reasons for this oversight is that many of the financial accounts requiring a beneficiary designation are established earlier in life. There may be a life insurance policy that was purchased when you were first married, an IRA that you opened prior to marriage, etc.
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Having a sound financial plan dictates that you ensure there are designated beneficiaries for all your retirement plan accounts, life insurance policies, and other assets, and that they are the intended recipients based on your current familial arrangement. It is often not as cut-and-dried as it first seems. Following these guidelines should help you avoid the most common mistakes:
Do not leave the beneficiary lines blank. If you don’t name specific beneficiaries for your accounts, or if you name your estate as the beneficiary, your heirs will likely end up in probate court. This can be both time-consuming and costly. If assets go to your estate, they are subject to the reach of creditors. A better option is to choose individual beneficiaries and list them on the forms.
Consider trusts for beneficiaries who are minors. In some states, minors face restrictions until they turn 18 or 21. If you designate a minor as a beneficiary, a court will appoint a guardian to manage the funds until the child reaches the age of majority. Alternatively, you might establish a trust to handle the funds and name the trust as the beneficiary. Thus, you maintain control now and provide asset protection for minors when you are gone.