Check Your Beneficiary Designations!
Your beneficiary designations matter and are easily overlooked, sometimes for years. You list them on your retirement accounts and life insurance contracts, and maybe on your bank and brokerage accounts. If you skip this step, perhaps assuming you’ll handle it later, the default option is often your “estate”, meaning your accounts have to go through probate.
We’ve discussed this in prior posts over the years but this concept is worthy of repetition.
The paperwork for some accounts, such as Schwab’s IRA application, often has a predetermined order of priority if you forget to name your own beneficiaries. First it’s your spouse and then your kids (natural or legally adopted) but the form doesn’t automatically include stepchildren. Third comes your estate as beneficiary and that usually means probate.
Is that what you want? Would you instead prefer to list your own beneficiaries to avoid ambiguity? Or do you have beneficiaries whom you’d like to receive an uneven portion of your account? Maybe charities? Or as is the case with the story I’m linking to below, did you list someone during what’s now a prior life and want to update that to your current situation?
Here are a few important points to remember when thinking about beneficiary designations.
- They’re per account and designations on one don’t apply to another. There’s nothing stopping you from listing your spouse on all of your IRAs, your grandchild on your Roth IRA, and charities on your life insurance, whatever you want. Your spouse typically has to agree by signing a form if someone else is a primary beneficiary, but you can get creative.
- Lots of account types can have beneficiaries. IRAs, Roth IRAs, your plans at current and former workplaces, even bank accounts, and of course life insurance. Adding beneficiary designations wherever possible is cheap estate planning.
- Beneficiary designations can override your will. Just because your will or trust lists your current spouse as beneficiary of “everything”, that usually has no bearing on an old 401(k) still held with a former employer that lists your ex-spouse as beneficiary.
- Accounts with named beneficiaries usually bypass probate. In my experience most beneficiaries (spouses, adult children, and so forth) get access to the funds in a week or two after signing some paperwork and submitting a death certificate. Compare that to probate in CA taking a year or more. Your beneficiaries can accelerate the process if your estate is small (less than $185K in CA currently) but avoid this if possible. And probate is expensive. Some sources suggest that 4% to 7% of an estate can go to various costs.
- Your beneficiary designations are revocable but durable – nothing changes without you! You should review your designations periodically to ensure they look right. For most people this is simple because you probably listed your spouse as primary beneficiary and maybe your kids as equal contingents. But I ask again, are you sure this is what you want? Do you want to equalize a financial gift for one kid by increasing another’s share of a retirement account? Have your balances grown and you want to shift who gets which account and how much, maybe considering tax consequences? Lots of options to personalize your beneficiaries if you think about it…
Okay, so on to the story that started the wheels turning this morning…
The following link goes to The Wall Street Journal and details a legal battle between brothers fighting to keep their deceased brother’s old 401(k) from going to a girlfriend he had decades ago. Her claim is clear – she’s listed as the 100% beneficiary of a specific account and there’s paperwork to prove it. The brothers’ claim is ambiguous – we don’t think that’s what our brother intended. Who knows what can happen in the legal system and I’m not an attorney, but everything I’ve learned over the past 20+ years in this business indicates that the former girlfriend is the decedent’s lawful beneficiary. Is that what the brother actually wanted? Who knows because apparently the only document he left behind was the beneficiary form he completed decades ago.
Don’t let that be you. Don’t let this happen to the person or people you feel should inherit your remaining assets. Don’t make them go through probate unnecessarily and help them avoid the legal system if at all possible.
You can check your account statements to see who you’ve listed as beneficiaries. If it’s not there, check your online portal. If you can’t find them anywhere, call the company! Or if we’re managing your accounts, reach out to us and we’ll tell you exactly how you’re set up and can assist with updating as needed.
One of the issues in this lawsuit was the former employer not making information from “old” paper documents viewable online. I’ve seen this before. Your beneficiary listing will say something like “on file” versus showing specific names. Trust but verify, as the saying goes. Doing so could save your beneficiaries a lot of trouble.
Here's the link to the story I mentioned.
Have questions? Ask us. We can help.
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