Seven simple rules to understand beneficiary forms

Keeping up-to-date and routinely checking your beneficiary forms will prevent heartache.

“To be distributed pursuant to my last will and testament” sounds straightforward when leaving one’s possessions to their heirs. But what happens if that IRA, bank account or other important account has a beneficiary form attached to it? In the eyes of probate court, it is simple. The beneficiary form wins every time. Beneficiary forms override wills.

Why? Because beneficiary forms give heirs the ability to circumvent the probate process in order to receive funds in a timelier manner.

Beneficiary forms can cause a loved one to be disinherited. This mainly occurs because account holders forget and fail to update their forms. To prevent this from happening, you should coordinate your beneficiary forms with your overall estate plan and review designations every few years, especially after a life-changing event such as marriage, divorce, birth or death. You have the option not to name beneficiaries, and then funds would flow to your estate and be paid out per your last will and testament.

Whom can you name as beneficiaries?

  • Individuals
  • Trusts
  • Charities
  • Other organizations (Church, University, etc.)
  • Your estate
  • No one at all

Whom should you not name as beneficiaries?

  • Minors – Set up a trust payable at age 25 for those under 18 or 21, depending on laws in the minor’s state.
  • Disabled persons – Small inheritances can prevent them from getting government benefits
  • Avoid naming your estate on retirement plans – Required to be taxed and paid out within 5 years if estate is named.

7 simple rules to remember:

  1. Do not leave beneficiary lines blank – Leaving lines blank or not naming beneficiaries will likely have your heirs end up in probate court. If assets go to your estate, they may become exposed to creditors.
  2. Use trusts for beneficiaries who are minors – Most states place restrictions on minors and usually a court will appoint a guardian to handle the funds. Establish a trust receivable at age 25 and name the trust as the beneficiary.
  3. Understand key rules – When designating Beneficiaries ask questions and read the fine print. Remember Beneficiary forms, in most cases, override wills.
  4. Let your beneficiaries know – Tell your Beneficiaries what you have named them on and where to find contact information for the advisor and where to locate important documents. Also, give important contact information to your advisor.
  5. Check and re-check – Make sure Social Security numbers, telephone numbers and addresses are correct. Make sure names are properly spelled and figures are accurate.
  6. Use percentages instead of dollar amounts – Due to fluctuations in markets, values of accounts will rise and fall. By using percentages your heirs will still receive their portion of intended inheritance.
  7. Name contingent beneficiaries – Avoid assets being transferred to your estate and going through probate in case of primary beneficiary death by naming contingent beneficiaries when appropriate.

For additional information, read about the designation of beneficiary forms or how naming the wrong people or failing to update documents can create a mess for your heirs. Kiplinger included another story about the dangers of mistakes on beneficiary forms.

Michigan State University Extension offers financial management and homeownership education classes. For more information of classes in your area, visit MI Money Health.

Did you find this article useful?