Beneficiary designation mistakes Florida families make, and how to avoid them

When a life insurance policy is payable to your estate, the proceeds become part of the estate "for all purposes" and are administered through probate (Fla. Stat. 222.13). That means delay, court costs, and exposure to your creditors, when the same proceeds paid to a named person would generally have been protected. Leaving the form blank, or naming someone who died before you, often has the same result, because many policies and plans default to the estate.

For retirement accounts, an estate is not an individual, so it generally can't stretch payouts the way a person can. Depending on your age at death, the heirs may have to withdraw and pay tax on the account faster. Our guide to Florida probate explains the process the estate would go through.

Insurers and plan administrators generally won't pay a large sum to a child. Florida lets parents, as natural guardians, collect and manage up to $15,000 in total for a minor without a court appointment, including life insurance and benefit plan proceeds (Fla. Stat. 744.301(2)). Above that, a court-supervised guardianship of the property is often needed, with annual accountings, and the child generally receives the money outright at 18.

Better options usually include naming a trust for the child, or a custodian under the Florida Uniform Transfers to Minors Act. Custodial property is generally turned over at 21, or at 25 if the custodianship was set up that way (Fla. Stat. 710.123). A trust can hold money longer and set its own rules.

Money left directly to someone who receives SSI or Medicaid generally counts as income when received and as a resource after that, which may push them over the $2,000 limit (20 CFR 416.1123). The usual fix is to name a third-party special needs trust as beneficiary. Retirement accounts left to certain trusts for a disabled or chronically ill beneficiary may also qualify for longer payout periods (26 U.S.C. 401(a)(9)(H)(iv)), but the trust has to be drafted for it. Our special needs planning guide explains the trust options.

Florida has a safety net. If you were a Florida resident at death and your marriage was dissolved by court order, a designation of your former spouse made before the divorce is generally void, and the asset passes as if the former spouse died first. The rule covers life insurance, annuities, IRAs, payable-on-death and transfer-on-death accounts, and employee benefit plans (Fla. Stat. 732.703).

The exceptions are important. The rule doesn't apply where federal law provides otherwise, where you re-named the former spouse after the divorce, or where a court order or settlement requires you to keep them as beneficiary. Chapter 121 state retirement plans are excluded (732.703). For employer plans governed by ERISA, the U.S. Supreme Court held that a state revocation-on-divorce law was preempted (Egelhoff v. Egelhoff), and that the administrator properly paid the ex-spouse named in the plan documents (Kennedy v. Plan Administrator). For non-ERISA life insurance, the Court upheld a similar Minnesota statute (Sveen v. Melin). The safest course is to change the forms after a divorce, unless a court order says otherwise.

If your only beneficiary dies before you and there's no contingent, the account may fall to your estate. Florida's transfer-on-death securities law says that if no beneficiary survives, the security belongs to the owner's estate (Fla. Stat. 711.507). Many forms also let you say what happens to a deceased child's share. Options such as "per stirpes" (to that child's descendants) differ from forms that split the share among the surviving beneficiaries. Read the form's definitions, because they vary.

In many 401(k) and other employer plans, federal law makes the spouse the death beneficiary unless the spouse consents in writing to another choice. That consent must acknowledge its effect and be witnessed by a plan representative or a notary (29 U.S.C. 1055(b)(1)(C), (c)(2)). A form naming your children, with no valid spousal consent, may simply not work. This rule generally doesn't apply to IRAs, where your form controls, subject to Florida's homestead and elective share rules for other assets.

Remarried couples and blended families should check this closely. Our guide to remarrying later in life covers prenuptial agreements and other planning.

Payable-on-death bank accounts and transfer-on-death brokerage accounts are useful probate-avoidance tools. Trouble starts when they're added one account at a time. A parent who puts one child on a $200,000 account and another child on a $20,000 account has made an unequal plan, even if the will says "equally." Those accounts also don't pay estate expenses, which can leave the probate estate short. And a TOD form naming your spouse can hurt if that spouse is on Medicaid; see when the healthy spouse dies first.

If you have a revocable trust, naming the trust as POD or TOD beneficiary often keeps everything consistent. Our guide to funding a revocable trust explains how.