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Checking and Double-Checking Beneficiary Designations - May 22, 2018

When it comes to your estate plan, ensuring appropriate beneficiary designations is just as important, if not more important, than your will. When you start a job, open a retirement account, or take out a new life insurance policy, one of the initial forms you will complete is a beneficiary designation. This form dictates who will receive the assets upon your death. Far too often, beneficiary designations are not updated appropriately and the person you wanted to receive the assets, doesn’t.

Recent examples

  • Joe starts a new job, which means a new 401(k) account and life insurance policy. Unmarried and with no children, Joe names Mom as beneficiary.  Five years later, Joe gets married and starts a family.  Joe forgets to update the beneficiary designations. Joe dies suddenly, and those accounts are paid to Mom, not his surviving spouse.  In the best situation, Mom recognizes the error and pays the proceeds to Joe’s surviving spouse to take care of their family. However, there are gift tax implications to consider. Worst case scenario, Mom and Joe’s surviving spouse don’t get along and Mom keeps all of the proceeds for herself.

  • Jack is married to Diane and they have two children together.  He remembers to update his beneficiary designations after his marriage and the birth of his children.  Years later, Jack and Diane get divorced.  The divorce decree states who gets what assets, including that Jack retains full control over his 401(k). But, Jack doesn’t update the beneficiary designation. Diane remarries and has another child.  Jack dies.  Following his beneficiary designation, his retirement account is paid to Diane, not to his children. Hopefully, Diane will use the assets to support the children, but there are no assurances, and now the account is subject to creditors of Diane.

Doesn’t the default take care of me?

In some cases, state and federal laws set forth the rights of a spouse and the automatic revocation of certain designations upon divorce. However, those laws have exceptions and only apply in certain circumstances. One very large exception is the state laws regarding revocation for a former spouse are often preempted by federal laws relating to employer-sponsored plans. Relying on a default is not a good way to handle your assets.

What can you do?
  • Check your beneficiary designations (and the terms of your estate planning documents) from time to time.
  • Keep a copy of the beneficiary designation form in your safe with other important papers.  Then when you are “pretty sure” you updated the beneficiary after you got married or had a child, it is easy to confirm.  
  • Most importantly, when you have significant life changes, such as marriage, divorce, or birth of a child, check the terms of your estate planning documents and your beneficiary designations to ensure the appropriate parties are named.

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