Beneficiaries are individuals whose names you put on your estate plan, life insurance, or other documents and who receive access to your assets and money upon your death. It is usually considered good to designate beneficiaries so that your family members are not found battling in court for your property and money after you pass away.
However, it is important to weigh both the pros and cons of something before you make a decision. While designating beneficiaries is often considered good, it has certain pitfalls that need to be talked about. To understand them all and figure out the solution, you can seek legal consultation from an estate planning attorney.
Drawbacks of naming beneficiaries
1. Outdated beneficiary choices.
One common disadvantage of naming beneficiaries is having to review the document from time to time to make changes to the list. This is because you may go through a number of significant changes in your life that may require you to remove or add people constantly. For example, if you go through a divorce, you will need to remove the name of your ex-spouse. Again, if you remarry, you will have to add the name of your new spouse.
In case you forget to make changes after significant life changes, problems can occur after you pass away. You do not want your ex and current spouse to keep fighting court battles after you die.
2. Potential for disputes.
Designating beneficiaries in your estate plan allows you to leave your assets, property, and money to people who you love and who are worthy of everything you have earned in your life. However, it is also a potential for disputes among family members. For example, your sister may have expected to receive a piece of property that you left with your brother. Or your children may have conflicts due to the “unfair” allocation of assets.
3. Failure to name a contingent beneficiary.
After beneficiaries, you also need to name secondary or contingent beneficiaries. These are backup beneficiaries in case your primary beneficiaries do not want to or are unable to inherit the assets due to some reason, perhaps death. Designating secondary beneficiaries allows you to smoothly transfer your assets to the intended recipient without the probate process.
4. Risk for individuals who rely on government benefits.
Even though you might have the best intentions for your relatives when you designate them as a beneficiary on your estate plan, they may lose their government benefits. This is because certain public assistance programs have an income or asset limitation or threshold. If you have more than a certain amount in your name, you won’t be entitled to the benefits anymore.
Hire an estate planning attorney to know more.