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Top 5 Beneficiary-Form Boo-Boos

Dayana Yochim
April 23, 2008

Naming beneficiaries should be the easiest task when it comes to estate planning, right? Simply jot down who gets your stuff when you're gone, then provide them with a list of delightful vignettes from your life to frequently and publicly share with anyone who will listen.

If only. Many people get this basic task all wrong, much to the joy of ex-spouses, the IRS, and tabloids angling for a nasty inheritance scoop. In 2001, The New York Post ran a headline declaring a "Pension Pickle!" after Anne Friedman's $900,000 pension went not to her beloved husband of nearly two decades, but to her sister, who refused to share the bounty. Not even the state Supreme Court could right the oversight: The beneficiary form Anne filled out in 1974 and never updated was legally locked down.

The biggest beneficiary-form blunders
Before you dash off your spouse's name, or put Junior's Social Security number on the dotted line, make sure you're not making any of these mistakes:

  1. Assuming your will is going to take care of all the details.
    Beneficiary designations always trump what's in a will. These documents must be consistent with one another: If you set up a trust, designate the trust as the beneficiary, not the person you named in the trust to inherit the money.
  2. Subjecting your heirs to an avoidable tax bill.
    Failing to name beneficiaries on your IRA (or consigning it to your estate) robs your heirs of the ability to maintain tax-advantaged growth over their lifetime (via a stretch IRA). Without a beneficiary, your IRA money will go through probate, and your family (excluding spouses) will be required to withdraw the money within five years. Most beneficiaries don't even wait that long: They take hold of the entire IRA at once. Doing so not only incurs an immediate tax bill, but also subjects all subsequent earnings and capital gains to income taxes. On a $100,000 inheritance earning $5,000 a year, anyone in the 25% tax bracket just bought themselves an annual tax bill of $1,250.
  3. Forgetting to update forms when life happens.
    Just as bad as failing to name a beneficiary is not updating designations when beneficiaries marry, divorce, come of age, or tick you off. That's how exes and bitter sisters-in-law strike it rich.
  4. Not having a plan B.
    If your primary beneficiary isn't around to collect, and no secondary beneficiary is named, the court decides who gets the dough. Be exact. You can name multiple primary and secondary beneficiaries, so don't be afraid to spell out how you want your assets divided.
  5. Naming minor children as beneficiaries.
    Until age 18 or 21 (depending on state laws), minors can only inherit limited amounts. Designate a financial guardian or set up a trust for the kiddos. Either should have detailed directions on how to manage the windfall until the children are of age.

Other boo-boos
There are plenty of other benefi