All My Children
It is very common for a beneficiary section of a financial instrument (life insurance policy, IRA, etc.) to allow the covered person to leave the benefits to all surviving children rather than naming them. The problem with this option is that it creates an additional legal requirement for these beneficiaries - they will need an affidavit both proving they are a child and proving the number of children surviving. This slows down the process of benefits reaching the beneficiaries and can sometimes create hardship when there are complications involved, such as divorce and remarriage opening the door for step-children to claim benefits from policies meant for others.
The beneficiary names should always be spelled out to avoid any confusion. The vast majority of financial tools allow beneficiaries changed very easily, often online, and for free. A salesman who pitches the all surviving children option as easier is speaking from his or her perspective; it assures fewer calls from clients requesting assistance with updating beneficiary information. Policies can list many things for beneficiary and open-ended terminology ("siblings") is bad. Further muddying the waters are community property states where spouses are entitled to half of the wealth of a spouse, which can extend beyond the death of the spouse. So, should a person name "children" as beneficiary and one child dies, if that child lived in a community property state the spouse is entitled to half of the benefit regardless of who is executor for the deceased child's estate. Estranged family members can stake claims to benefits if the beneficiary section is not clear.
The worst part of this surviving children option is that it is usually not required. By the point a parent purchases long-term financial planning tools they usually have the number of children set and it is rare for the child to pre-decease the parent. Even if the child pre-deceases the parent it is most often the case the parent would want the child's spouse to receive that portion of the benefit - which is eliminated by "surviving children" clauses. The worst mistake is to list "my spouse" rather than a name because it opens the door for ambiguity and claims made that were not the intention of the covered person. There is no excuse for long-term planning done without naming the spouse. The only reason to leave "spouse" undefined is if divorce and remarriage were is anticipated, which is not a great form of planning.
The beneficiary names should always be spelled out to avoid any confusion. The vast majority of financial tools allow beneficiaries changed very easily, often online, and for free. A salesman who pitches the all surviving children option as easier is speaking from his or her perspective; it assures fewer calls from clients requesting assistance with updating beneficiary information. Policies can list many things for beneficiary and open-ended terminology ("siblings") is bad. Further muddying the waters are community property states where spouses are entitled to half of the wealth of a spouse, which can extend beyond the death of the spouse. So, should a person name "children" as beneficiary and one child dies, if that child lived in a community property state the spouse is entitled to half of the benefit regardless of who is executor for the deceased child's estate. Estranged family members can stake claims to benefits if the beneficiary section is not clear.
The worst part of this surviving children option is that it is usually not required. By the point a parent purchases long-term financial planning tools they usually have the number of children set and it is rare for the child to pre-decease the parent. Even if the child pre-deceases the parent it is most often the case the parent would want the child's spouse to receive that portion of the benefit - which is eliminated by "surviving children" clauses. The worst mistake is to list "my spouse" rather than a name because it opens the door for ambiguity and claims made that were not the intention of the covered person. There is no excuse for long-term planning done without naming the spouse. The only reason to leave "spouse" undefined is if divorce and remarriage were is anticipated, which is not a great form of planning.
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