Life insurance policies, employer-sponsored retirement plans, annuities, and retirement accounts. Odds are, you look at this list and see at least one financial account that you hold. All of these accounts are generally payable upon the death of the account holder to beneficiaries named via beneficiary designations. Beneficiaries could also be named on certain brokerage accounts, certificates of deposit, mutual fund account, and bank accounts.
After going through the process of opening the account and making their first beneficiary designations, many forget all about the all important beneficiary form. Life circumstances can change drastically over the course of the years from the day you open a 401(k) account at age 25 with your first employer and when you start seriously considering your retirement. While you may have changed the beneficiary designations from your parents to your spouse immediately after your marriage, did you make sure to change the alternate to your children when they were born?
Beneficiary designations are extremely important factor to consider in creating your estate plan. Take, for instance, a situation where a child stands to inherit qualified plan policies from his recently deceased parents. This child has a disability and requires governmental assistance to maintain his lifestyle. His parents knew about the possibility of losing governmental assistance from a windfall of inheritance and smartly informed their estate planning attorney of their son’s disability. The attorney in turn included a supplemental needs trust in their estate plan to both provide for their child and protect his government benefits. However, the parents did not follow through on altering the beneficiary designations on the qualified plan that held $200,000 of assets to specifically name the supplemental needs trust for the benefit of their child created in their estate plan. Instead, the designations listed the child as the beneficiary. The child then inherited the assets outright in his name, jeopardizing the child’s eligibility for governmental assistance for his disability.
In the event your beneficiary passes away before you and you did not name a secondary beneficiary before the time of your death, the total amount of the account will ordinarily be paid to your estate and the proceeds will need to go through probate. This means that your estate may be raised to a value where more time, effort, and expenses are required to go through probate, which may lead to a circumstance where the person whom inherits your assets could be receiving the money out of line with your wishes.
A scenario to show how this could take place is where a widowed spouse decides that she will split her assets between her two children or to the child’s own children if the child did not survive her. She decides to make things equal by bequeathing her $500,000 house to her son and naming her daughter as the beneficiary of her retirement accounts worth $500,000. The widow informs her lawyer and the lawyer writes her will leaving everything in her estate, which is just her home, to her son. The beneficiary designations on her retirement accounts indicate her daughter as the primary beneficiary, with no secondary beneficiary. Unfortunately, the daughter dies suddenly in a freak accident, predeceasing the widow, leaving no beneficiary designated. With no beneficiary designation, the assets went to the widow’s estate and from there were distributed to her son. The widow would have preferred that her daughter’s children were provided for but without changing her designations to provide for this, her wishes were not fulfilled.
As you can see, a major part of the process of estate planning is taking your beneficiary designations into account to carry out your estate goals. To ensure that you reach those goals, make sure your estate planning attorney is fully aware of all of your accounts and assets and work with your financial advisor and attorney to make your estate planning wishes become a reality.