Keeping Beneficiary Designations Up to Date
If you don’t know who your beneficiaries are, then it’s time for a beneficiary designation check. Even if you think you remember, every now and then, they should be checked.
If you don’t know who your beneficiaries are, then it’s time for a beneficiary designation check. Even if you think you remember, every now and then, they should be checked, according to an article “Are your beneficiary designations up to date?” from Community Voice.
It has become very common for estate plans to be largely controlled through beneficiary designations. Many people accumulate wealth in 401(K)s or IRAs which pass to named beneficiaries, or clients add named beneficiaries at the suggestion of a banker to avoid probate. With so many beneficiary designations controlling so many accounts and so much wealth, it’s critical to make sure they reflect your wishes.
I even had a law school professor who suggested one of the worst estate planning mistakes was failing to address beneficiary designations!
Your choices may change with time. When did you open your very first IRA? Do you even remember when you purchased your life insurance policies? If it was back in the 1990s, chances are good the people in your life have changed, as well as your priorities. Your kids are likely grown, or maybe you have more of them! Maybe one of your beneficiaries has developed some bad habits, and you want to control how the money will impact them. There are lots of reasons beneficiary designations don’t fit anymore.
When we first filled out the beneficiary designations, we were all confident they’d be the same forever, but time and life have a way of changing things. In five, ten or twenty years, big changes may have happened in your life. Your beneficiary designations and your estate plan need to reflect where you are now, not where you were then.
The best way to address beneficiary designations is reviewing them with your estate plan annually. If you’re still working, your employer may have changed custodians for your retirement plan and your insurance policy. When a new custodian takes over, sometimes beneficiary designations can get lost in the change, that has happened many, many times. I’ve also seen companies say they won’t honor beneficiary designations because of internal policy changes.
Life events can also affect your beneficiary designations. Did you get divorced? I’d imagine you don’t want your ex as the beneficiary of your accounts. Do you have minor beneficiaries? You want to name a custodian of that money in the account plan as part of your designations, otherwise your loved ones are headed to guardianship court.
If you don’t have a beneficiary designation on these accounts, or any account where you have the option to name a beneficiary, you may have a bigger problem. The tax-focused part of your estate plan could be undone if you thought your 401(k) would go to your spouse but your spouse predeceased you.
What’s the best way to handle this? Make sure your designations coordinate with your estate plan. What most people don’t realize is that whatever choice you make on the beneficiary designation overrides anything in their estate plan because it passes right to that beneficiary. That sounds good, but notice most of the problems I’ve recounted are because your circumstances change, or contingencies aren’t adequately planned for. You also have no control over the contingencies if a named beneficiary should pass away and you failed to address it in the designations.
Your estate plan can cover all of this, which is why directing assets to your estate plan via beneficiary designations might be a great idea. Everything will go to the persons you intended, but the estate plan will help bypass all of these problems.
Moral to the story, don’t rely on beneficiary designations and make sure you keep them up to date and coordinating with your estate plan to ensure your assets pass to your beneficiaries as you intended.
Reference: Community Voice (September 30, 2022) “Are your beneficiary designations up to date?”