Common Beneficiary Mistakes
Many people think that because they have a handful of legal documents in place, their legacy plan is complete. However, there are some small, commonly missed details that you’ll want to be aware of to make sure that your money is being passed down in exactly the way you intend.
John Stillman: You're listening to Wright Money Tips. Welcome to the show. I'm John Stillman alongside Isaac Wright who is of course a chartered financial consultant, the president of Financial Dynamics and Associates, and the author of Navigate Your Way To a Secure Retirement.
John Stillman: In our last couple of episodes, we talked about our 2019 retirement planning checklist. Nine things that you want to be sure that you've addressed if you're in retirement or retiring in the next decade or so. And Isaac, the very last thing on that checklist, we talked about our legacy plans. Do you have your legacy plan nailed down? And that actually dovetails perfectly into today's topic, which is common beneficiary mistakes that we see people making when it comes to the beneficiaries on their accounts.
John Stillman: Now that could be the beneficiaries of life insurance, that could be just having a beneficiary on an IRA. These are some of the common mistakes that you want to be sure that you look out for and obviously this is a very specific piece of your retirement planning. If you think of your entire retirement plan as the contiguous 48 states of America, what we're talking about right here today is like Chesterfield. Okay? We're zoomed in really far on one detail, but it's important to understand that there are so many issues like this in your retirement plan. You just need to be sure that you're working with somebody who knows where all these pitfalls are and can help you. Otherwise these are the types of details you might miss.
Isaac Wright: Oh sure, it can actually cause an outbreak of a lot larger than a county if you don't have this right either. So I think maybe to say this, John, I think beneficiaries when we talked about the legacy planning here in our last show, many people today, and this is a great thing to lead in with I think, is people that have, they come in the door sometimes or I talk to them, they have their will. They may even have a trust. They have their power of attorney, medical directives that may or may not have it done recently, but in their world they feel that they have their plan, their legacy plan done.
Isaac Wright: Because so many people that have legal documents created just assume that their accounts are funneling right in to what they've established in their will and/or trust. That's the farthest thing from the truth in a lot of respects because there's rules to how money is ultimately paid and distributed. So that's why we wanted to create a little follow up here on a specific part of your legacy plan on beneficiaries. So, yeah, it's a small portion of a plan, but it's a very important detailed oriented portion as well.
John Stillman: So one of those mistakes that we see sometimes is naming minors as beneficiaries. You can do it, it's not illegal, but you want to be aware of some pitfalls if you're doing that.
Isaac Wright: I think what you want to look at is if you're naming a minor and you pass away that minor, and they're most states, I'm not going go into all the details of every state law, but you're going to be in a place where you're going to have an age of 18. Up until that point, money is going to have to likely be held and appointed through the court system by a guardian to maintain those funds and use those funds for the best interest of that minor and you may or may not be comfortable with that.
Isaac Wright: People sometimes, depending on the amount of money, especially if it's a larger amount of money, may want to create some legal documentation of how that money specifically needs to be paid out. Because the thing about this, let's say it's a $250,000 life insurance policy and you're 18 year old grandson inherits money. Think about how you were. Hell, I think about how I was at 18, somebody gives me a quarter million dollars, Lord knows where that money's going. So you may be fine feeling that that's not my problem. You may be fine by thinking hey, I need to have the responsibility of making certain this money is there for them in the capacity that I want. And there's no wrong answer, but just keep in mind that naming minors as beneficiaries can cause some issues.
John Stillman: Certainly something to be aware of. Another mistake is not coordinating your beneficiary designation in your will. A lot of people say, "Well, it doesn't really matter who I put as the beneficiary on this. My will says everything goes to this person and this person, so that'll take care of it." Well, not so fast.
Isaac Wright: Yeah. Well, that's what I was leading in with it almost. I didn't even realize and like I said, coming in into this beneficiary mistake list, I think that's probably number one is just because you have a will, maybe you have more than a will. It doesn't mean that everything that you've said in your will is going to transpire in all of your accounts.
Isaac Wright: For example, if you have an IRA account, that IRA, if you have a beneficiary on it, let's call it if you have money sitting in an investment account, your beneficiaries that you've named on any investment account will have typically precedent over what your will states. That's something that may be okay with you. You may be aware. If you're not aware, you need to be aware of it, but these again are small details that can really compound into some significant problems about where money's actually going to go versus where you may have wanted it to go.
John Stillman: One problem that some people have is not naming alternative, or successive, or contingent might be the word for it, contingent beneficiaries. You say, "All right, well this is the person that gets my money if something happens to me," and you don't think about the fact that if something happens to them before something happens to you, then what happens?
Isaac Wright: Well, you have to keep in mind, normally what we see a lot of times is on accounts that we are helping manage, you're bringing in to the office. We notice in there, let's say in our planning that they had their spouse listed as the primary beneficiary with no contingent beneficiaries. Husband and wife passes away together, and I've seen that happen twice in almost 20 years, not fun.
John Stillman: Really? Like an accident of some kind?
Isaac Wright: Yeah.
John Stillman: Not like The Notebook where they're just so in love that they die together?
Isaac Wright: Yeah. Unfortunately it's not that romantic John. It does put people in a place where all of the sudden where does that money go? Well, you know it doesn't have a beneficiary. Well now it's going to go through likely probate, it's going to go through the system. It may not necessarily go to whom you want it to. This is why, again, part of our service review process after families have been with us is to make certain that these things are addressed.
Isaac Wright: Like I told you at the top of the program over a 20, 25, 30 year retirement, I promise you, you're going to address your beneficiaries in your legal documents several times because of things that you can't control but you do have control over what we're covering here. Number three is to simply make certain you have a contingent beneficiary if Lord forbid the primary beneficiary dies first.
John Stillman: A lot of things to keep in mind, and again this is simple stuff. This is filling out a form one time and then just being sure that you're thinking about anytime life changes, do I need to make changes to these forms? This is not arduous work that you have to do over and over again. It's just being sure you've checked all the right boxes and filled in all the right blanks.
John Stillman: Another beneficiary mistake, Isaac, naming your estate as beneficiary. Again, I think that's a tempting thing for people to do if they don't really have people specifically that they want to pass money to. They just say, "Well, I'll name the estate as the beneficiary and when I'm gone they can figure it out."
Isaac Wright: No, I think John, that's good to say because I think naming your estate as the beneficiary likely means your assets are going to have to go through probate and this is also going to give the courts a say in how your assets are distributed. That may not necessarily be what you want in terms of control and probably most importantly, the court can have the right to access those funds, access those assets that you have given to the estate to possibly repay debts.
Isaac Wright: That can also be avoided. So never, ever assume that just because you have a will and you name your estate that beneficiary, that things are going to run exactly the way things would be versus maybe naming out specific beneficiaries. So it's an issue. We have seen that before. Just keep that in mind and that's something that we are here to help with as well.
John Stillman: So Isaac, this one probably seems like something where people would say, "Really? Did you have to tell us that?" But the reality is it can cause more headaches than you think. And so the last one that we'll mention here today is making errors on the application or the beneficiary forms. You might say, "Well, I'll put down this person, I think this is their birthday. Yeah, whatever, they knew who I'm talking about." Well, they may or may not know who you're talking about.
Isaac Wright: I'll say who's going to know that exactly. Some rep up at the investment firm, "Oh yeah, I knew Johnny Sue. Yeah, I grew up with that person."
John Stillman: But I think a lot of people say, "Well it's my niece who has this name so they'll know that that's who I mean, right?"
Isaac Wright: Yeah, no. I tell you what, and I want to be clear because I don't want people to be nervous, scared or otherwise, but most firms, insurance companies, people that have "beneficiary forms", they have done a whole lot better service, let's call it in the last five, 10 years than I saw in my first five or 10 years as far as many places are requiring these things now where you have not just their name and relationship. I mean you have social security number, their address, date of birth. I mean they really want to tag exactly where that money wants to go.
Isaac Wright: Now keep in mind the more information you're filling out, you want to make certain that you are filling out and having the person that's working with you filling out the forms correctly with dates of birth and so forth. So just again, making an error on an application may not be the end all be all, but it's something you want to prevent and just put your family in a place, put yourself in a place that you have these things checked off.
Isaac Wright: So as we've kind of talked about these top five things when it comes to understanding beneficiaries, legacy planning, it's all a part and parcel of this. If you have any concerns, you reach out, you let us know. We're here to help, 804-777-9999. You can text the word tips, T-I-P-S, to that same number and that'll generate a response. We'll make certain that we get back to you. We can talk to you over the phone before you ever walk in the door.
Isaac Wright: So I'm trying to make it very easy for people to approach us as far as developing a relationship towards their financial and retirement affairs. But John, I think everything that we've covered here, even getting back into January now going into February, very important things that can be done, that can be executed on and can be monitored, having the right team in place. So we're here to help.
John Stillman: If you'd like some of that help the number to call is 804-777-9999. That's 804-777-9999. You can of course find out more about Isaac and the team at Financial Dynamics, just head over to the website, WrightMoneyTips.com. That's Wright with a W like Isaac's name. WrightMoneyTips.com. More information about what we've talked about today, as well as anything else you'd like to know about getting in touch with the team at Financial Dynamics. For Isaac Wright and everybody on the team, I'm John Stillman. Thanks for tuning in to Wright Money Tips. We'll talk with you again soon. Have a great day.
Announcer: Information is for illustrative purposes only and does not constitute tax, investment, or legal advice. Always consult with a qualified investment, legal or tax professional before taking any action. Investment advisory services offered through Global Financial Private Capital LLC.