Naming Beneficiaries: Have you made any of these mistakes?

I bet you've named a beneficiary on something: maybe an IRA, a life insurance policy, or your 401(k). It's quick and easy to do. And being named as a beneficiary makes it quicker and easier for your heirs to receive what you've left to them, compared to the costs and delays of probate.

But that doesn't mean beneficiaries are fool proof. Check out these stories. Have you made any of these mistakes?

Frank was a young, single guy when he got his first job with benefits, so he listed his parents as the beneficiaries on the life insurance policy that came with the job. Six years later, Frank is at the same company, and married with three little kids. He dies in a tragic accident.

The result? The insurance will be paid to his parents, not to his wife and children.

Winnie's will says that her son gets the house, and her daughter gets her 401(k). But she listed both the son and the daughter as beneficiaries on the 401(k).

The result? The beneficiary designation controls who gets the IRA, not the will. A will only controls those assets haven't been distributed to heirs by some other means. That means that the son gets both the house and half of the 401(k), while the daughter gets just half of the 401(k).

Paul never named a beneficiary on his IRA, but his will leaves everything to his only child, Jason. Paul contributed the max to the IRA every year. When he retired, he transferred the balance from his 401(k) into it, too. There's a lot of money there! He died at age 67, and had never taken a penny out of it. Distributions aren't required until age 70 ½.

The result? Jason will inherit the account through the will. But he will have to empty the account within 5 years. That's the rule when 1) someone dies before they are required to start taking distributions and 2) there isn't anyone named on the account as a beneficiary.

Those distributions are taxable income. As a result, Jason will pay a lot of additional income tax in each of those five years. If Paul had named him as the beneficiary, Jason could have stretched the distributions out over his lifetime. He would have paid a lot less tax that way.

It's wise to review your beneficiaries periodically. Check to see that you still want those individuals to receive the money when you're gone. Look to see if you listed secondary beneficiaries, also called contingent beneficiaries, who would receive the money if the primary beneficiary(ies) have passed away or disclaim (refuse) it. Also, check that your beneficiary designations don't conflict with instructions in your will.