Jul 16, 2021 Naming Your Beneficiaries: Avoid Common Mistakes

We get a lot of questions from clients on naming beneficiaries to their accounts. While the paperwork is relatively straightforward, it is important to pay attention to a few key areas to avoid some common mistakes. We’ve outlined a few key areas keep in mind when naming a beneficiary

Updating your will is not enough

Your beneficiary designations trump your will. Even if your will is more up to date and accurately reflects your wishes, your assets will go to your named beneficiary in the event of your death. This makes reviewing your designations important to make sure they align with your wishes. This is especially relevant in the event of a major change in your family circumstance (death, birth, divorce, etc).

Pro-Rata vs Per-Stirpes

Per stirpes is a Latin phrase that means “by branch” whereas pro rata means “in proportion”. The differences are most clear in an example. Say you have two beneficiaries, Lewis and Clark, each set to receive 50% of your assets. Lewis has 2 daughters while Clark has 2 sons. If you choose pro rata and Lewis passes away before you, Clark will receive 100% and Lewis’s 2 daughters will receive nothing. However, if you choose pro stirpes, Clark will receive 50% while Lewis’s 2 daughters will receive 25% each.

Here is a diagram outlining what happens after Lewis passes under each scenario. Remember, both Lewis and Clark were both set to receive 50% initially.

Pro Rata Beneficiary

 

Pro Stirpes Beneficiary

No Contingent Beneficiary’s

If you don’t have contingent beneficiary’s and your primary beneficiary passes away before you, your assets will go to your estate. There are cases when this is ideal, but often, a backup beneficiary is an effective way to fulfill your wishes.

Naming Minors as Beneficiary’s

When a minor inherits assets, they are placed into the hands of a trustee (or court appointed trustee) until the age of majority. In Washington, this means receiving all the resources at the age of 18. Many young adults may not be ready to inherent a large chunk of money they received as a result of their parents dying. Some parents elect to create a testamentary trust to hold the funds for the beneficiary until certain ages or milestones are met. This lets the resources take care of the minor and transfer title when they will hopefully be better equipped to manage the funds.

To discuss naming a beneficiary in more detail please reach out to us here

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Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

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