A beneficiary is an individual, institution, trustee, or estate which receives or may become eligible to receive benefits under a will or insurance policy, retirement plan, trust, annuity or other type of contract. The entire point of naming a beneficiary is to ensure that your assets go where you want them to when you die.

So whether you want to leave the proceeds from your life insurance policy to your family, surviving spouse, charity, or a trust, or you're wanting to ensure that probate is avoided, and your specific wishes (who gets what, how much, and when, etc.), the beneficiary listed on your policy is where it all happens.

But as simple as it seems, there are common mistakes that people make when designating a beneficiary that can actually hinder the ability of your wishes to be carried out. So here are the top 5 mistakes you need to know:

#1 - Naming a minor child as a beneficiary

Parents use life insurance to provide financially for their children if they die unexpectedly. So it's understandable that many people initially think to name their children as the beneficiary of their policy. But the problem is that life insurance companies won't pay proceeds directly to a minor. So it is hugely important that you also set up a trust, which specifies your wishes as well as name a guardian to manage the money on their behalf. Then what you do is you name the trust as the beneficiary of your life insurance policy. If you do not have this in place, and you pass away with your children named as the beneficiary of your policy, the courts will appoint a guardian for them. It is always better to avoid the courts and have your wishes for what will happen already in place.

#2 - Not specifying conditions for certain beneficiaries

When naming multiple beneficiaries, it's important to specify how you want the money to be split up. Equal shares? Or a certain percentage to each person? Do you want to specify how the money is to be spent or distributed? For example, maybe you want a child to wait to get the money until they are 21 and use the money only for educational purposes. By establishing a living trust, you are ensuring that the money will be used how and in the ways that you would like.

#3 - Not being specific

If you have specific people, organizations, or ways you way your money to be distributed, now's the time to put it in writing! People often make the mistake of not being detailed in naming their beneficiaries. For example, do you have more than one child? Or children from a previous marriage? Then it's important not to be general and list your beneficiaries as "my children". Instead, be specific and list names and social security numbers. If you're leaving money to a charity, list the name, address, and tax i.d. number.

#4 - Never updating beneficiary information

Life changes. You get married, you get divorced, you have another baby, the one and only beneficiary on your policy could pass away. It is always important that you review your policy once a year and go over any changes that might have happened that year and see if there are updates that need to be made to your policy. The last thing you want is for your family to have to deal with your policy still naming your ex-spouse from ten years ago as the beneficiary of your policy because you never updated it! (It happens!)

#5 - Getting taxed by having a different owner, insured, and beneficiary

As a rule, the death benefit from a life insurance policy is generally tax free (Yeah! How often does that happen?) But if you have your life insurance policy set up where one person owns it, another person is the named insured, and the beneficiary is a third person, the death benefit may be considered a taxable gift!

For example, if you purchase a life insurance policy and name yourself as the owner, but the policy covers your spouses life, and you name your child as the beneficiary of the policy, you are effectively creating a gift of the policy's proceeds for your child, and you may be the one subject to taxation if the amount exceeds federal tax limits. Bottom line is, talk it through with your insurance agent, and consult a tax advisor to decide the best way to avoid a tax situation.

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