One of the most important aspects of estate planning is determining who you want to be the beneficiaries of certain financial accounts. For example: Who is going to inherit your bank accounts, life insurance, or retirement accounts? You want to make sure your hard-earned assets go to the ones you love, without delays and other problems arising.

However, far too often, three mistakes are committed that can upset the purpose of your estate plan:

  1. You fail to update your beneficiaries,
  2. Fail to consider the age or circumstances of the beneficiary, or
  3. You fail to provide for contingent (or backup) beneficiaries.

Here’s what you should know about these beneficiary blunders and what you should do to avoid them:

What are the Consequences of Beneficiary Blunders & What Can You Do to Avoid Them?

The most common beneficiary blunders people make include not updating beneficiaries, making sure beneficiaries qualify, and failing to add contingent beneficiaries. The consequences of these mistakes can be significant.

Failure to Update Beneficiary Designations

One of the most common mistakes that many people make is not updating their account beneficiaries. Every few years or so, you should make sure the beneficiaries you have listed on certain accounts are the persons who you want to receive the funds. If you don’t update your primary beneficiaries, then someone you may no longer want to receive part of your assets will receive them upon your death.

Understand that life changes overtime. Sometimes persons who you once loved or trusted may now be distant from you. Other times, the beneficiary’s life has dramatically changed. For example, you originally intended to leave a life insurance policy to your son but you have recently found out that he has a drug problem. If that is the case, you may balk at leaving him that policy outright. Perhaps a better solution would be to change the beneficiary on your life insurance policy to a trust to ensure that the money is used for his benefit wisely.

Another example would be when a person marries. A single person may have his parents listed as beneficiaries on certain accounts or perhaps a sibling. But when that person marries, he or she may forget to change the beneficiary to their spouse. As such, at the person’s death, the funds in the account may go to another individual that, in all likelihood, should not have inherited.

To help avoid these issues, it’s a good idea to set aside a specific time to review all your every few years or whenever a significant life event occurs. Updating beneficiaries is usually a fairly simple process and involves only a minimal amount of paperwork from a bank, financial institution, or insurance company.

Failure to Appoint Qualifying Beneficiaries

The second blunder you can make is failing to consider whether the beneficiary can take – or should take – possession of the account funds. For example, minor children cannot accept property until they reach the age of 18 in Tennessee (it’s 21 in some other states). Because minor children cannot legally hold property in their own name a guardian may have to be appointed to take possession of it until they reach the age of majority.

To avoid the expense and delay of creating a guardianship, make sure you create a trust in your estate plan for any funds you want to leave a minor. Here’s how that works: You can name the beneficiary of the account as your estate. In your will you state that you want those account assets to go into the trust you created for the minor. Once the minor turns a certain age, they receive the assets outright and free of trust.

Furthermore, when listing beneficiaries consider any disability they may have. Many individuals with disabilities receive government benefits. Directly naming such persons as beneficiaries on an account can effectively end these benefits when they receive the funds. The better option may be to leave those assets in a special needs trust to supplement the individual’s needs.

Failure to Provide Contingent Beneficiaries

A third serious blunder you can make is not assigning contingent beneficiaries. Your primary beneficiaries may qualify to own property in his or her own name and may be exactly who you want to receive your assets, but what happens in the event the primary beneficiary has:

  • died;
  • doesn’t want the inheritance; or
  • cannot be located?

In the event any one of these situations materializes upon your death, the funds meant for that beneficiary will fall to your estate unless there is a contingent beneficiary. Depending on who the heirs or beneficiaries are of your estate, you may not want those account assets to go to those persons. Moreover, depending on how you planned your estate, you may want to avoid probate. Any significant assets going to the estate will most likely trigger probate and frustrate the careful estate planning you previously made.

The solution to this problem is simple: Add qualifying contingent beneficiaries to all your financial accounts. For example, if you allocate 100 percent of your life insurance policy to your spouse, you can add your adult children as contingent beneficiaries in equal shares – or however you wish to divide it. You can also choose to allocate, for instance, 50% of a financial account to your spouse and the other 50% to your child and then include your child as a contingent beneficiary for your spouse’s share – but don’t forget to add someone as the contingent beneficiary of your child’s share, too.

You can divide the shares however you like, but the important point to remember is to have backup beneficiaries in addition to primary beneficiaries.

The Key Takeaway

When we plan our estate, we take care to make sure our estate plan matches or wishes for the distribution of our estate at our deaths. However, failing to consider life changes, the age and circumstances of the beneficiary, or forgetting to add contingent beneficiaries can be problematic. Take a look at your accounts and make sure that your primary beneficiaries qualify and are who you want them to be. Also, make sure you also add contingent beneficiaries as a backup plan in case a life event interferes with your plan. Remember to contact an estate planning attorney with any questions you have regarding planning for account beneficiaries.