Although you may have a detailed will, it doesn’t control all your assets when you pass away. Beneficiary designations on accounts such as life insurance policies or 401(k)s override your will.
If you’re not careful when filling out your retirement account beneficiary form, you accidentally could cut someone out of their inheritance or start conflicts that can go on for years. It’s essential to be aware of the potential pitfalls of naming beneficiaries to ensure your wishes are followed.
Not Designating a Beneficiary
If you don’t keep your beneficiary designation up to date or fail to name one, the benefits may go to the last beneficiary. This may be an ex-spouse or a previously deceased individual.
According to Odyssey Advisors, if the benefit goes to an estate, your family members will need to go through probate court and deal with the legal ramifications.
The assets in your account will be frozen until a will is located. Debts still owed by you will be paid before assets are released. This is the probate process. If you have a beneficiary, it will not go through probate.
Many people think that without a beneficiary, the funds go to heirs listed in the will, but that isn’t necessarily true.
Change Designation If Divorced
A divorce decree may split your assets, but it does not impact any beneficiary designation, according to a 2009 U.S. Supreme Court decision.
If you don’t want your ex-spouse to receive the benefits, then you must change that. Otherwise, when you pass, they will receive the benefits.
This is true even if you have a new spouse.
Eliminating Grandchildren From Bequest
If you designate your children as your beneficiaries, and one of them passes, their share of your benefit may not go to their children. You could be cutting out your grandchildren. That’s because most plans provide inheritance through a per capita distribution.
Beneficiary Designation of Per Capita
According to Barron, Rosenberg, Mayoras & Mayoras Law, per capita is a Latin phrase that translates literally to “by head.” If one of your beneficiaries dies before you do, that beneficiary’s share is divided among the surviving named beneficiaries. Descendants of the deceased receive nothing unless they are specifically designated as beneficiaries.
For example, under the per capita stipulation, if you have three children, they would each receive one-third of your funds. If one passes before you do, the two remaining children would inherit one half of the estate. Grandchildren of the deceased child would inherit nothing.
Beneficiary Designation of Per Stirpes
Another election is per stirpes, which is a Latin phrase that means, literally, “by roots” or “by branch.” When it comes to distributions, it means that a beneficiary’s share of the assets passes to their lineal descendants if the beneficiary passes before the inheritance vests.
It designates a class of beneficiaries rather than designating only specific individuals to inherit property.
For example, under the per stirpes rule, if you have three children, they would inherit one-third each of your funds. If one child passed before you, their child, your grandchild, would inherit the one-third portion. If there were more than one grandchild, they would split the one-third portion.
Choosing between per capita and per stirpes is a critical consideration. If your plan doesn’t offer per stirpes, you must designate the grandchildren who will inherit their parents’ portion of the funds.
Naming the Wrong or Not Updating Beneficiaries
According to PEBA SC Retirement Systems and State Health Plan, family or friends’ names could be similar. For example, they could be Jr., III, different middle names, etc. You must have the exact name of your beneficiary if you wish a specific person to inherit your fund.
According to U.S. Bank, minors under 18 (21 in some states) can’t directly inherit assets. They will need a court-appointed guardian to manage their inheritance. If you don’t want that to happen, consider setting up a trust or naming a guardian.
Life isn’t constant, and who you want as a beneficiary may change. Make a note to update your beneficiaries every year. Be aware when monumental events like death or divorce happen in your life so you can make ongoing changes.
You must update your beneficiaries if you roll your plan over to a new job’s plan. These beneficiary designations don’t follow you.
Overlooking Your Loved Ones’ Financial Needs
Ensure your beneficiaries understand the tax ramifications of being a beneficiary. They may need to take required minimum distributions if they want to avoid taxes from taking a one lump sum.
An inheritance won’t affect Social Security Disability Insurance benefits because they aren’t need-based. But according to Affleck and Gordon Attorneys at Law, it may put the recipient in another tax bracket.
An inheritance affects recipients of supplemental security income and any Medicaid received if it puts assets of more than $2,000 for individuals or $3,000 for couples, according to the Internal Revenue Service.
Create a Legacy With Your Beneficiaries
Beneficiary designations shape your loved ones’ financial future and create a legacy. Review your designations carefully and prevent future heartaches and financial complications. Thoughtful planning creates security and honors your relationships.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
