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The easiest place to start estate planning is to make sure all your beneficiary designations and property titles are in the correct names. After all, major mistakes occur when you fail to check beneficiary designations. Beneficiaries are people you name to receive your property once you die.

Having these designations correct is important. Why? Because a good deal of your assets do not have to go through probate, a costly and time-consuming process. These assets can go directly to your heirs.

AVOID PROBATE

A probate court determines ownership of assets that don’t have a named beneficiary. For example, if you have a bank account in your name only and die, the bank does not know who owns that account. The bank account becomes part of your probate estate. The probate court then determines who will receive the proceeds in the bank account. They will either follow your Last Will and Testament (if you have one) or state law if you don’t have a will.

If you have a bank account and name your spouse as the beneficiary, your spouse will get the proceeds of the bank account without having to go through the probate court.

SET UP BENEFICIARY DESIGNATIONS CORRECTLY

When you set up bank accounts, investments accounts, or retirement accounts, you name beneficiaries who will inherit these accounts when you die. Called Transfer on Death (“TOD”) accounts, these operate outside of any instructions to your will.

Say, for example, you set up a savings account when you were 18 and named your mom as the beneficiary. Later you get married but you forgot to change your TOD beneficiary designation on that account. You later create a will which instructs that all your assets go to your spouse. When you die, the bank does not follow the terms of your will. The bank honors the TOD designation you made. Therefore, the money in that savings account goes to your mother, who may have predeceased you. If your mother has predeceased you, the account would go to her heirs. The money would not go to your spouse.

Set up all new accounts with the correct beneficiary designations. Once set up, check those periodically to make sure they are accurate.

CHECK BENEFICIARY DESIGNATIONS ON ALL FINANCIAL ACCOUNTS

Check and double-check all beneficiary designations on your financial accounts. Make sure they are correct and up to date. If you have any life insurance policies, 401(k) or retirement accounts, or pensions, double-check that the beneficiaries are correct and that you have named back-up beneficiaries. I am willing to bet if you did a careful review of all your beneficiary designations, you will be surprised to find one or more corrections that should be made.

If your bank promotes an attractive CD rate and you sign up for a 2-year CD, the bank may not ask for a beneficiary designation. Even though you might have other accounts at that bank with correct beneficiary designees, such as your spouse, do not assume the bank will automatically use your designee as the one for the CD account. Make sure all your accounts have the correct beneficiary designations.

CHECKING BENEFICIARY DESIGNATIONS ALSO AVOIDS STICKY SITUATIONS

Checking the titling of your property and accounts and checking your beneficiary designations is not only a good way to protect your family financially, it also avoids embarrassment. I had a client with a small money market account. At the time he opened the account, he put his longtime girlfriend as the beneficiary and then forgot he did so. Fast forward to 10 years later, he is married to another woman. Upon review of the husband and wife’s accounts, his wife discovered the money market account would have gone to the ex-girlfriend. Awkward! Although it was a nominal amount, changing the beneficiary designation to the wife avoided potentially sticky and/or embarrassing issues.

As you can see, having the correct beneficiary designations avoids confusion and avoids probate. Protect your loved ones with the correct beneficiary designations.

Now that you have that first step done, check out other steps for your complete estate plan.

Parts of this article have been excerpted from Estate Planning for the Sandwich Generation: How to Help Your Parents and Protect Your Kids.

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