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Avoid the Beneficiary Trap

If you have a life insurance policy or IRA, you were required to name a beneficiary (the person or persons who directly inherit the account when you die). Most other financial accounts don’t have a beneficiary, but wait – maybe they do. Bank accounts and CDs can be made payable on death (POD), which is another beneficiary-type designation. And now more recently stocks, bonds and mutual funds allow transfer on death (TOD) designations.

A beneficiary designation allows assets to go directly to someone without going through your estate distribution process (for example, avoiding probate). And there is the trap. If you don’t keep your beneficiary designations up to date, you could inadvertently cause a loved one to be disinherited. Remember: a beneficiary designation takes priority over a will.

Who should you choose as a beneficiary? You can name individuals (as long as they are not minors), trusts, charities, or even more than one individual or a group of individuals. If you don’t name a beneficiary for a non-retirement account, the funds will be distributed typically to your spouse or estate.

I’m not a lawyer and don’t dispense legal advice so if you have questions on beneficiaries, make sure you check with a qualified attorney. Here is something I can tell you:

Make sure you regularly check who you named as a beneficiary on all your accounts – including bank accounts if you used the TOD approach. This is especially important if you or someone close to you has a change in life situation, for example, marriage, divorce, birth or death of a loved one.