When Did You Last Update Your Critical Beneficiary Designations?


It’s important to review the beneficiary designations on accounts like life insurance, IRAs and pensions.

There have been many cases of retirement account owners who have been divorced and remarried but failed to update their beneficiary designations. There are even more cases of account owners failing to update designations after a change of broker, or a major life change with the account holder or their heirs.

If you forget to update your beneficiary designations, you may find that the person who receives your money and assets isn’t the person you want to receive your estate. That can frequently be the case in the event of a divorce, remarriage or if new children or grandchildren were welcomed into the family since your retirement plan account was started. If you named a charity as your beneficiary years ago, it may no longer exist.

This is why our clients at the Foster Legal Advisory Group are contacted at least annually and reminded to update their beneficiary designations. And if updates need to be made to their estate plan that’s all included in our flat fee rate. But remember that retirement accounts aren’t part of your direct estate and aren’t governed by the provisions of your will, so it is important to keep these retirement documents updated.

Take the example of Rick, who wished to leave a sum of money from his retirement plan to his long-time girlfriend that the family did not approve of. Because Rick wished to name his brother as his personal representative, Rick made the choice to do an IRA designation form naming his girl-friend as a beneficiary instead of naming her in his will. Unfortunately, when Rick became ill, he called his IRA broker who ‘offered to help’ him. The ‘help’ came in the form of moving the asset into a “managed account.” The broker never informed Rick that he had to update his beneficiary forms, which he had done a month prior. When Rick died only weeks later, it was discovered that because the forms were not updated, the entire IRA account was now going to the estate. In other words, the brokerage house claimed that since there was NO beneficiary for the ‘managed account’ the funds had to go to the estate – to be managed by the brother. Thus, without winning a lawsuit against the brokerage house and the brother, the girlfriend, lived with and cared for Rick until the time of his death, will not be given any money. This outcome was not Rick’s wish and the case will most likely go into a costly court battle that could have been avoided.

Assets can also be mis-distributed if some children are named as beneficiaries, but the document isn't updated to include those who were born after the initial designation. That’s why you should update your beneficiary designation right after any change in family status—and review it at least annually, so they never are out-of-date or incorrect.

You should always have contingent beneficiaries named as well. If you don’t name a beneficiary, or they died before you, the beneficiary may be determined by federal or state law, or by the plan document that governs your retirement accounts. For example, qualified plans like profit-sharing plans, 401(k)s, and money purchase pension plans, federal regulations automatically designate the spouse of the account owner as the beneficiary. This spouse could be the second or third wife who might not have a relationship with the account holder’s children from a prior marriage but would have been the intended beneficiaries. But under Federal law, without clear beneficiary designations, the spouse at the time of the account holder’s death has to approve of any other designation, and this must be in writing and notarized. And many brokerage houses have terms in their documents dictating which state laws must be used; for example Charles Schwab requires the use of California law - and California attorneys to litigate a case.

Many IRA plan documents also have default beneficiary options, so if you designate two people as your beneficiaries and one predeceases you, the share that belonged to the deceased beneficiary automatically goes to the surviving beneficiary who now gets 100% of the asset instead of the 50% you intended.

Making a proper beneficiary designation is a crucial component of your estate planning. Be sure to talk to a us at the Foster Legal Advisory Group, today!

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

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