In estate planning, naming beneficiaries is a standard practice, making it easier to pass on assets. However, this seemingly straightforward process isn’t without complexities. While there are clear advantages to naming beneficiaries, there are also potential issues that can affect how assets are distributed. In this article, we explore the challenges tied to naming beneficiaries in estate planning, highlighting common problems and providing insights to help you make informed choices.

What Is a Beneficiary?

A beneficiary is someone you choose to receive money, assets, or specific items like sentimental belongings after your death. You can specify these individuals in estate planning documents, such as a will.

Outdated Beneficiary Choices

The most common disadvantage is not reviewing and updating beneficiary choices regularly. Life changes, like divorce or new relationships, can render previous choices unsuitable. For instance, if you designated your spouse as the primary beneficiary but later divorce without updating your plan, your ex-spouse might still inherit assets. Similarly, if you have new children or remarry, failing to update beneficiaries could exclude them from receiving intended assets.

Failure to Name a Contingent Beneficiary

Another issue is neglecting to designate secondary or contingent beneficiaries. The absence of a “backup” beneficiary can result in an asset that would normally bypass probate now being subject to the probate process. This delay can significantly postpone the distribution of assets to your loved ones.

Minor Beneficiaries

Naming a minor as a beneficiary can pose challenges if they are still underage at your passing. In such cases, insurance companies or retirement administrators may face difficulties in handling the situation. They may be unable to distribute the funds until directed by a court or until the minor reaches the legal age of majority (usually 18 in most states).

Risks for Government Benefits Dependents

If your beneficiary relies on government benefits, they may lose them after your death due to income or asset limits in certain assistance programs.  A better alternative is to leave assets to a loved one who is in a position needing support through a supplemental needs trust. This trust enables them to receive assets without jeopardizing program eligibility, ensuring proper asset management for the beneficiary’s care while preserving government benefits.

Other Considerations

Naming a beneficiary can change the status of an asset, making it accessible to creditors. For instance, designating your estate as a life insurance policy beneficiary not only brings the asset under probate court jurisdiction but also exposes it to creditor claims. This could result in the funds being used to settle estate debts rather than for their intended purpose.

Consult with an Expert

There are other potential downsides to naming beneficiaries to non-probate assets. However, not everyone may be impacted the same way. The best advice is always to seek help from your estate planning attorney prior to making any decisions.

If you’d like us to help you navigate potential pitfalls and tailor a plan that best suits your needs, feel free to schedule a strategy session with us.