Dayana Yochim, writing in the Motley Fool (http://www.fool.com/) listed five common mistakes that people make when completing the beneficiary form for life insurance policies. I thought it was worth mentioning them here as well.
1. You assume that your will is going to take care of all the details. Your beneficiary designations always take precedence over your will. Make sure that your will and your beneficiary forms are consistent with one another. If you have a trust, make sure you designate the trust as the beneficiary, not the person you name in the trust to inherit the money.
2. You subject your heirs to an avoidable tax bill. Failing to name beneficiaries on your IRA (or consigning the IRA to your estate) robs your heirs of the ability to maintain tax-advantaged growth over their lifetime. Without a beneficiary, your IRA money will be probated and your family will be required to withdraw the money within five years. If your heirs, with the exception of your spouse, withdraw the entire IRA (which most do) they will incur an immediate tax bill, and all subsequent earnings and capital gains are subject to federal income tax.
3. You forget to update your beneficiary forms. This is a very common mistake. You fail to change your beneficiary designations when the beneficiaries marry, divorce, come of age, die or you decide that they should no longer benefit from your passing. Do you really want your ex-spouse to realize an unexpected windfall?
4. You fail to designate a back-up beneficiary. If your primary beneficiary isn't around to collect and you don't name a second beneficiary, the court will decide who inherits the proceeds. You can name multiple primary and secondary beneficiaries. Don't be afraid to spell out how you want your assets divided.
5. You name minor children as beneficiaries. Until children reach the age of majority (either 18 or 21 depending on your state), minors can only inherit limited amounts. You should designate a financial guardian or set up a trust for minor beneficiaries. Make sure that the trustee or financial guardian has detailed instruction on how to manage the funds until the minor(s) come of age. Also, don't forget about mistake number three; eliminate the trust or guardianship when the beneficiaries reach majority.
You can avoid all of these mistakes by having someone with detailed legal and financial knowlege review your beneficiary forms and then compare them with your will or trust documents. Make sure that you schedule this review annually to insure that you are keeping up with changes in the law and changes in the personal situations of you and your beneficiaries.
