WTOP Interview: 7 Common Mistakes to Avoid When Naming Your Beneficiaries
Shawn Anderson: It is 5:11. If something happened to you or your spouse, who would get all of your assets? Choosing your beneficiaries is an important decision, but many of us make mistakes when it comes to designating our beneficiaries, that can have consequences for those loved ones.
Hillary Howard: Joining us live to talk about it, Nina Mitchell, co-founder of Her Wealth and a Senior Wealth Advisor at The Colony Group in Bethesda. Great to have you back Nina
Nina Mitchell: Great to be here, thank you.
Hillary: So, a lot of people really don’t even think about this, but when they do what are some common mistakes that they make?
- Well, first of all, the first mistake is not naming a beneficiary at all, which means that the probate court will determine who your beneficiary is for you.
- Another mistake, is having outdated primary and contingent beneficiaries, which could lead to inheritance going to an unintended beneficiary, especially in the case of a divorce and an ex-spouse.
- And the third mistake is naming your estate as the beneficiary of your retirement plan, which is actually more common than you think. Retirement distributions payable to an estate, go through probate which means extra costs and lack of privacy and the retirement assets must be distributed within 5 years of the decedent state of death. And remember, you have to pay income taxes on non-Roth retirement distributions, so ideally you want to roll over and extend the timing when you take these distributions and only spousal and individual beneficiaries have that option to stretch out their retirement distributions, based on their life expectancies. Estates do not have that option.
Shawn: Now, of course it’s common for parents to leave their assets to their kids, what should moms and dads consider in that situation?
Nina: Alright, well first, consider the consequences of naming minor children as direct beneficiaries. In this case, assets would be distributed outright to your children as soon as they reach age 18 or 21. And I would say, providing an 18 year old immediate access to a lot of money is probably not a good idea for many reasons. So, it’s better to create a living trust as the beneficiary with specific provisions for the minors who are beneficiaries of that trust. And then secondly, if you want to include all your children as your beneficiary, instead of naming each one individually, the preferred designation is per stirpes, which means equally among all my children and this includes an equal share for your deceased children, child’s children.
And then lastly, before you name an adult child as a co-owner of one of your accounts, consider if there are any potential gifting or creditor issues for that co-owned portion.
Hillary: What happens if parents have a child with special needs? There must be a special way to accommodate for that.
Nina: Well, there is and actually, anyone with a special needs child really needs to have very careful estate planning and should consult with an attorney who specializes in creating either a special or a supplemental needs trust, because that’s the trust that should hold the child’s inheritance directly. You don’t want the child to get that inheritance directly, because it may disqualify valuable government benefits and aids that they would have been entitled to.
Shawn: Like wills, do you find that people just say, “Oh, I’m going to do my beneficiary stuff and I’m going to update it” and then they just put it off and put it off and years go by?
Nina: Oh, absolutely. I mean nobody really wants to do it, but it’s critical. I mean you know, you’re doing it for your loved one, for your families.
Hillary: Nina, thanks so much for being with us.
Nina: Thank you.
Hillary: That’s Nina Mitchell with The Colony Group in Bethesda. For more, go to wtop.com, search Her Wealth.