Kaplin Stewart

Naming beneficiaries isn’t as easy as it sounds, p2

You can think all you want about how you want your property distributed after your death. You can talk and talk about who will inherit your retirement accounts or who is the beneficiary of your life insurance policy. None of it will mean a thing if you don’t tell the bank or the insurance company what you want. They need to know, perhaps more than anyone, what will happen when you die, and they generally ask for that information on a beneficiary election form.

Just naming a beneficiary, though, can put the insurance payout in the wrong person’s hands. Some mistakes can dramatically reduce the amount of money that goes from the bank to the beneficiary. There are common mistakes that we can all easily avoid.

Mistake #2, continued: Not establishing financial controls. We left off in our last post talking about what can happen if you hand an irresponsible loved one even a moderate amount of money. The risk that the money will be wasted is only compounded by the fact that some assets will be added to the estate and, so, subject to Pennsylvania and federal taxes.

One solution is to establish a trust and name that trust as beneficiary. In the trust document you can specify who will get distributions. It is also possible to specify when the beneficiary will get the distribution — say, his 21st birthday or the day she graduates from medical school. The trust will keep the funds out of the probate estate, too, so there will neither be a tax liability nor much delay with immediate distributions.

Trusts are especially useful when the beneficiary is a minor child. That brings us to the third mistake people can make when naming beneficiaries — which we’ll cover in our next post.

Source: Bankrate.com, “5 IRA beneficiary form mistakes to avoid,” Shelly K. Schwartz, accessed Nov. 20, 2014