“By failing to prepare, you are preparing to fail.” Benjamin Franklin
Failure to update beneficiary designations can be costly. A recent client review offers a case in point. The husband receives a $6,000 monthly federal pension payment. When he remarried, he did not update the beneficiary form, which still listed his deceased spouse. The federal government allows 24 months to change the beneficiary designation to the second spouse if the retired employee remarries. Because he failed to make the change within the allotted time, the second spouse forfeited the survivor benefit when the husband died. Significant income will need to be made up from other sources.
Beneficiary designations allow you to name a person or entity to receive assets when you die. No one enjoys thinking about their own demise, but the consequences of ignoring beneficiary designations, or worse having no designations, can be problematic to the recipient. So let’s take on this complex but important topic in order to complement a well-crafted estate plan.
It is important to note that some assets pass via beneficiary designation, separate from your will. Examples include individual retirement accounts (IRAs), retirement plans (401(k), 403(b) and 457 plans), life insurance, annuities, and transfer-on-death (TOD) accounts. The beneficiary listed on the form will supersede your will or trust. It is important to review and update your beneficiaries after life events including the birth of a child, death of a beneficiary, marriage and divorce.
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Where to begin? Start by reviewing current assets that pass via beneficiary designation. Do the beneficiaries listed align with your goals? Consider naming both primary and contingent beneficiaries. Do you have philanthropic goals? Considering naming your favorite charity to receive the tax-deferred IRA assets and list your adult children to receive your tax-free life insurance proceeds. While this process may seem overwhelming, it is customary to seek help from legal, tax and financial professionals in making sure designations match your desired outcome. A reputable estate-planning attorney can assist you with listing the beneficiaries correctly to maximize certain strategies, like using a stretch IRA.
Beneficiary designations offer a convenient, inexpensive way to make simple, outright transfers of specific assets at death. While updating a beneficiary form is a simple task, it may cause unintended consequences if it does not follow the will or estate plan. Unintended consequences could include distributions to an ex-spouse, subjecting a nonprobate asset to probate, and limited distribution options with potentially significant tax implications.
Owning assets requires occasional tune-ups to the plan, but most people find this falls in the category of a good problem to have.