Many assets allow you to name a beneficiary, that is, whom you would like to receive the asset in the event of your death. Life insurance policies and retirement accounts are common examples but some other account types such as bank accounts and non-retirement investment brokerage accounts also may allow you to name beneficiaries through a Pay on Death (POD) or Transfer on Death (TOD) form. While these forms are generally straight forward, they often lead people to make inadvertent errors. We have identified six common mistakes people make when preparing for the distribution of their assets after death. This is PART FOUR OF SIX.
Misunderstanding contingent beneficiaries
Most companies allow you to name a contingent (backup) beneficiary should your primary beneficiary pre-decease you. It is important to understand that contingent beneficiaries will only receive a benefit if ALL of the primary beneficiaries pre-decease you. For example, if you name your four children as primary beneficiaries equally and your eight grandchildren as contingent beneficiaries, and one of your children dies before you, his/her share will NOT go to his/her children. Instead, it will go to the remaining three surviving children.
Example: John Doe has two children, Jack and Jill. Jack has two children, Hansel and Gretel. Jill has two children, Jacob and Wilhelm. John has named his two children, Jack and Jill, as primary beneficiaries- 50% each. Then he has named his four grandchildren, Hansel, Gretel, Jacob, and Wilhelm as contingent beneficiaries- 25% each. Jack passes away before John, leaving behind his wife and Hansel and Gretel. Later, John dies.
In this example, Jill would receive 100% of John’s life insurance policy as the only surviving primary beneficiary. Jack’s two sons, Jacob and Wilhelm, would not receive any of Jack’s share of their grandfather’s life insurance policy. After Jill dies, the money will go to her own beneficiaries.
This can be avoided by using a per stirpes designation. Per Stirpes is a latin word meaning, “per issue” and is a legal term that would allow the deceased beneficiary’s benefit to go to his/her children
Being aware of this type of common mistake can help you better prepare to ensure your wishes are followed in the event of your death. At Kramer Wealth Managers, we can help you coordinate with an estate planning attorney to make sure your estate goals and financial planning goals are in line with your personal WealthPath.
While the tax or legal guidance provided is based on our understanding of current laws, the information is not intended as tax or legal advice and should not be relied upon as tax or legal advice. Neither Osaic Wealth, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
