By Barb Theofilos, CPA
We have all been to the doctor for a check-up. Preventive measures can ward off unintended consequences or detect deficiencies early on. We go because we know it's the best thing for us and it will ultimately benefit us in the future.
So, when was the last time you had a beneficiary check-up? Just as your doctor wants you to get a regular medical check-up, your accountant wants you to have a beneficiary check-up. When you update your Will, which governs the administration of your estate, this does not automatically update your beneficiary designations. There are certain assets that pass on to your beneficiaries as a matter of law and are governed by beneficiary designations and are generally not governed by the provisions of your will. This detail is often overlooked by clients because it's the last thing on their mind. With so many things competing for our time and attention, it's easy to lose track of financial details such as this one.
There are key events that take place in our lives that require updates to beneficiary designations. A few of these include a death in the family, a birth, divorce, marriage, or even remarriage. Updating our financial records is sometimes the last thing on our mind in these instances but it is still extremely important. Missing an opportunity to update these records can have unintended consequences.
Take William for instance... his situation involved a $400,000 employer-sponsored retirement account. He named his wife, Sarah, as his beneficiary back in 1975, shortly after they were married. The couple divorced 20 years later in 1995. Sarah waived her rights to the benefits of William's employer sponsored retirement plan as a part of the divorce decree; however, William never got around to updating the beneficiary designation with his employer. He died in 2000 without making these changes. So, what happens now?
The employer-sponsored retirement plan documents stated that beneficiaries had to be formally updated on a beneficiary form and an outside beneficiary change was not sufficient. This means that Sarah’s waiving of her rights to the retirement plan funds pursuant to the divorce decree had no effect and she still received the funds, even though this was not William's intention.
If William had updated the beneficiary designation before he died, his retirement account would have been paid to the person of his choice, rather than his ex-wife, Sarah. The beneficiary designation could not be changed once William passed away.
When updating one’s beneficiary designations it is important to use the plan's official beneficiary form to ensure that the change is being made in the manner that you intended. This important point is evidenced in William's story above. Keep copies of your beneficiary designation forms and verification's received from your account providers.
Also keep in mind that you can designate contingent beneficiaries as well. This is especially important, should your primary beneficiary die before you or at the same time as you.
Examples of plans with beneficiary designations that would need to be updated include, but are not limited to the following:
- Life insurance policies
- Employer sponsored benefit plans
- 401(k)/403(b) plans
- Defined benefit plans
- ESOP or other stock purchase plan
- Stock option plan
- Excess benefits plan
- Retirement accounts such as IRAs, SEPs
The example above demonstrates the importance of keeping beneficiary designations up to date, especially after life altering events such as death, birth, divorce or remarriage. It's easy to overlook this financial detail, but its oversight can have outcomes that were never intended.
