There a many people who don’t understand the significance of filling out beneficiary designations. It’s understandable and easy to forget, but slipping up can really cause a financial nightmare.
“What does it matter?” you might ask. Well, there are three reasons that you might want to keep track of your beneficiary designations and update them in the case of a big life changing event.
1. Failing to keep your beneficiary designations updated can cause the financial assets you worked so hard to accumulate to go to someone other than your beneficiary of choice. Imagine this: you were married, you got divorced, you later got remarried, had two kids with your second spouse, and you forgot to keep your beneficiary designations updated. You named your original spouse (spouse 1) as beneficiary of your 401(k) retirement plan, your Roth IRA, and the life insurance offered through your employer. Today, you don’t wake up in your bed. Instead you wake up face-to-face with St. Peter in front of the pearly gates.
While you’re up there, answering the most important question of your afterlife, your second spouse and kids are grieving over your death. Your first spouse, to whom you had no real connection anymore, is laughing all the way to the bank. She just inherited all your retirement assets from you and your second spouse and kids, whom you love very much, get nothing. Furthermore, your second spouse is now going to have to navigate through life as a single parent, on one income and, more than likely, only with the financial assets he/she accumulated to support the family. What a terrible situation. If only you could have avoided it and planned for the unthinkable….
Of course you can. Just keep your beneficiary designations up to date. You should review them every few years and always review them when a big life-changing event occurs, such as a marriage, divorce, birth, or death of a loved one. Financial assets and contracts that typically have beneficiary designations include, but are not limited to, employer-sponsored retirement plans, other retirement plans such as IRA’s or Roth IRA’s, pension plans, annuities, and life insurance (life insurance proceeds are received by the designated beneficiary income tax-free… so it is critical to keep the beneficiary information updated on life insurance contracts). You must specifically fill out a beneficiary designation form for each account or contract. Filling out one beneficiary form for all the accounts will not work.
2. If you fail to name a beneficiary altogether, your assets may go through your estate. If you created a will and filed it with the local courthouse, in the case of no beneficiary designation, assets may revert to your estate. At this point, the assets will pass by the wording of your will. Whomever you name in the will, in most cases, will be the rightful heir to that money. The process of assets passing through your will is called probate. When assets pass through probate, they are subject to both attorney fees and probate fees from the courts. The more assets you have passing through your will, typically, the more attorney fees and probate fees your estate will have to pay. In most cases, this isn’t a big deal but only if you keep your will updated to reflect your most recent wishes. That’s not always the case.
Naming your estate as beneficiary is generally not advisable.
3. If you fail to name a beneficiary, fail to have a valid will, and pass away, state law determines how assets will pass at your death. Suppose you’re still young. If you don’t anticipate passing away and, therefore, don’t see the point in filling out beneficiary designations, what do you think the chances of you having a valid will are? Slim to none. If you pass without a will, you passed away intestate. To pass away intestate simply means you didn’t have a will and now the state law of your state of domicile will typically determine to whom most, if not all, of your estate assets will pass. Every state has different intestate laws so asking an attorney about the intestate laws of your state is generally advisable. Moreover, having assets located in multiple states combined with passing away intestate can result in a very complex situation. In some cases (yes, this has actually happened), if you don’t have enough blood-related relatives, your estate can revert to the state and the state will take possession of most, if not all, of your assets at death. I’m not exactly sure, but I would assume that most individuals don’t want to leave their assets with any state when they pass away. Just a guess.
Paying attention to your beneficiary designations is vital to any financial plan. You should speak with your financial advisor whenever any life-changing events occur and you need to update your beneficiary designations. Moreover, you may want to stay in contact with your financial advisor at least once every few years to make sure that your beneficiary designations are listed as you want them to be. Being negligent in this area can leave your assets in the hands of people that you don’t want to inherit what you’ve worked so hard to accumulate. It can also leave families with little to inherit from you at a time when they may need it the most. Keeping beneficiary designations updated is essential to your financial plan.
Financial Executive, Member FPA
Kaufman Financial Services
This material is not intended to provide legal, tax or investment advice, or to avoid penalties that may be imposed under U.S. federal tax laws, nor is it intended as a complete discussion of tax and legal issues surrounding estate planning strategies. Clients should contact their own tax, legal and financial advisors to learn more about the rules that may affect individual situations.
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