I want to start by giving you a definition of what a beneficiary is in terms of beneficiary designations. A beneficiary of an account receives the account or proceeds of the account when an individual passes away. To most people, if they have taken care of drafting a will with proper legal counsel, then, in their mind, their beneficiaries will be taken care of the way they want them to be. The problem starts when individuals do not review how their beneficiary designations have been set up for their life insurance policies, IRA’s and 401(k) accounts.
Typically, people walk through the following process when they set up beneficiary designations for their life insurance policies, IRA’s and 401(k) accounts:
- They set up the beneficiary designations for their life insurance policy, for their IRA’s and their 401(k) when they take out the policy or when they begin contributing to their 401(k).
- They forget exactly who they named as their beneficiaries.
- They have a Will drafted for them by an attorney.
- The Will ends up naming different beneficiaries than the IRA or the life insurance policy.
- Big problems happen.
The thing a lot of people don’t realize is that the will does not have control over these life insurance policies, IRA’s or 401(k) accounts. If those accounts have designation of beneficiary forms, the beneficiary designation form controls who receives the account, not the will. Often, the old beneficiary designation is not what the individual wants now, in the present day.
If a person forgets to change their beneficiary forms, then they often have a significant percentage of their estate passing in a manner they did not realize it was going to pass. You would not want an ex-spouse, an individual you no longer have contact with, or someone’s estate to be the named beneficiary. Most of the time, settlement or divorce agreements do not supersede the beneficiary designation. That could mean the individual you no longer have contact with inherits the assets, not your family.
This is the same for accounts that are joint tenants with right of survivorship or payable on death. A lot of people will add a family member (usually a child) on an account thinking that they are just adding them as a signer. In reality, they are naming them as the beneficiary of that account at their death. The banks often have low level employees who are helping people fill out these forms and they don’t realize the legal significance of the choices being made on these forms.
So you may have your entire estate going to all your children equally under your Will but if 90% of the estate is in an account that’s right of survivorship to one child then you have effectively cut out all the other children.
You may be asking yourself: then what is the solution?
The solution is performing a beneficiary audit of all of your life insurance policies, 401(k), IRAs and reviewing the following things:
- Ensuring that the named beneficiary is the correct beneficiary and not an outdated one.
- Determining if a minor is the named beneficiary and checking to see if that is the most advantageous set up. In some states, that can increase legal and court fees.
- Making sure that if the beneficiary is a child, or other person with special needs or issues, to set up a trust for the benefit of that individual.
- Checking that the beneficiary is constructed so that estate taxes are minimized.
For a more in-depth read, please refer to this article by the Financial Planning Association.
If you need help with your beneficiary audit or setting up a trust as your beneficiary designation, we recommend you contact a professional attorney so you don’t have to worry whether the job has been done correctly.
The R Family – 2 by RebeccaVC1