Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted
Surviving spouse happy about deceased spouse not changing IRA beneficiary designation

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is something that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingency beneficiary, who will inherit the asset when you die.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes will be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship. Conservatorships are costly to set up. They must also make an annual accounting to the court. Conservators may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Learn more about updating your beneficiary designations.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

How Do Family Relationships Mess Up Estate Planning?

According to a recent Key Private Bank poll of financial advisors, 80% said that working through family issues is the most difficult aspect of estate planning.

With more and more blended families, the issues of equitable distributions among family members becomes even more complex. The interaction between parents, children, step-parents, and step-children can be tense in the estate-planning process—especially when a plan is put into action after a parent or step-parent’s death or disability.

Although these family dramas get in the way in many cases, there’s something you can do about it.

Having open family conversations about estate plans and wishes is the key. This can be hard because parents are afraid that sharing their wishes will cause conflict.

However, discussing your goals and how you’d like to share your wealth with your heirs, is only part of the story. You also have to update your documents to reflect your wishes. Review how your assets are titled and understand who is inheriting your wealth. From an estate planning perspective, you want to avoid probate and maintain control over the disbursement of your assets.

Probate is the process that states use to settle the estates of a deceased persons, who have not made arrangements to avoid probate. These proceedings are made a matter of public record, so there is no family privacy. It can also be expensive and time-consuming, and in some states can take a while, until beneficiaries get their shares.

Remember that retirement accounts like IRAs, 401(k)s and pension plans have named beneficiaries, so those assets pass directly outside of the probate process. The same is true for life insurance and annuities. These specific beneficiary designations—whether through “payable on death” or “transfer on death” accounts—will supersede any provisions in a will or trust. That’s why account holders and insurance policy owners should look at their beneficiary designations to be certain that the assets will transfer, according to their wishes.

Reference: CNBC (March 18, 2019) “This is the No. 1 issue keeping you from inheriting that windfall”

Why Should I Check My Beneficiary Designations?

Investopedia’s recent article, “The Importance of Updating Retirement Account Beneficiaries,” shares some of the problems caused by outdated beneficiary designations.

It’s not uncommon for retirement account owners, who’ve been divorced and remarried, to forget to update their beneficiary designations. It is also troublesome, if some children are named as beneficiaries but the document isn’t updated to include those who were born after the initial designation. To avoid these issues, update your beneficiary designations right after you have a change in family status and review them periodically, so they never become outdated or incorrect.

You can also write in a customized beneficiary designation to address “what-if” situations, like what if your primary beneficiary predeceases you and you fail to update the designation?

An IRA plan’s documents also default the designation, if the designated beneficiary predeceases the IRA owner. These options vary among IRA custodians and trustees. This option may reduce the administrative responsibilities from account owners, but it may not reflect their preferences. That’s why account owners should check the plan document and be sure that they update their beneficiary designations regularly.

Spouses, expecting that one will predecease the other, frequently designate each other as their beneficiaries. However, the issue of simultaneous death is then addressed by state law. This will decide that one spouse died first, even though both deaths occurred at the same time.

This determination is important, if there are children from a previous marriage because it may determine if all the children must be included or children from a previous marriage will be excluded. For this reason, the proper documentation naming successor beneficiaries for normal and extenuating circumstances is needed.

You can also create a customized designation to choose how that portion would be distributed, instead of having it default to the surviving beneficiary. For instance, if one of your beneficiaries has children, you can designate them to receive the primary beneficiary’s share, if he or she passes before you do.

When drafting your customized beneficiary designations, you can look at various options with your estate planning attorney to find the one that meets your needs. The beneficiary designation you select may determine, if your elections are carried over to the next generation.

Making a proper beneficiary designation is a critical part of your estate planning.

Reference: Investopedia (May 8, 2018) “The Importance of Updating Retirement Account Beneficiaries”