The most devastating mistake a person can make is to have an out-of-date beneficiary designation. Prior to a couple being married, beneficiary designations are typically your parents or other family members. A common mistake for young families is to assume that creating a Will changes the effect of a beneficiary designation.
Assets such as Life Insurance, IRAs, 401(k), and other investment accounts allow you to designate a beneficiary. This beneficiary designation is an independent legal designation that avoids Probate and, if you have an individual listed, distributes irrespective of what you have in a Will or Trust.
It is important to review your beneficiary designations regularly to ensure the provider has the correct individual listed. This includes when an account is moved to another institution or when changing employers.
Listing your Trust as Beneficiary
For parents with minor children, it is best to have the Trust listed as a either primary or contingent beneficiary. This allows a responsible use of funds that would have otherwise be distributed outright at an immature age. (For more information on creating a Trust, see Six Reasons to Create a Trust in Ohio).
For example, if you have two minor children and a $200,000.00 life insurance policy, if the beneficiary designation is to the children, individually, he or she will each receive 50% of the balance upon reaching age 18. If, instead, the beneficiary designation is a Trust, the children could receive distributions for the essentials in life such as college expenses, healthcare, rent, etc. Upon reaching a more mature age, 25, 30, and 35, the balance will then distribute outright.
In some cases, the Trust should not be named as the primary beneficiary of a retirement account. To do so may deprive a surviving spouse of certain income tax advantages related to retirement accounts. As part of our Estate Planning services, clients are advised on exactly how to title their assets and list beneficiaries.
See more on Beneficiary Designations