There are many account types that are governed by beneficiary designation, such as life insurance, 401(k)s, IRAs and annuities. These are the most common investment accounts people have with contractual provisions to designate who receives the asset upon the death of the owner.
Kiplinger’s recent article entitled “Beneficiary Designations – The Overlooked Minefield of Estate Planning” provides several of the mistakes that people make with beneficiary designations and some ideas to avoid problems for you or family members.
Believing that Your Will is More Power Than It Really Is. Many people mistakenly think that their will takes precedent over any beneficiary designation form. This is not true. Your will controls the disposition of assets in your “probate” estate. However, the accounts with contractual beneficiary designations aren’t governed by your will, because they pass outside of probate. That is why you need to review your beneficiary designations, when you review your will. One way to have your estate plan do what you want it to do is to set up a living trust and then list the trust as the beneficiary of your accounts. This way your accounts will flow into your living trust and your living trust will specify how the assets are distributed. You need to talk with an experienced estate planning attorney if this is something you think you might want to do.
Allowing Accounts to Fall Through the Cracks. Inattention is another thing that can lead to unintended outcomes. A prior employer 401(k) account can be what is known as “orphaned,” which means that the account stays with the former employer and isn’t updated to reflect the account holder’s current situation. It’s not unusual to forget about an account you started at your first job and fail to update the primary beneficiary, which is your ex-wife. Although in Texas, and ex-spouse will usually not be able to get the money, the funds will go to your estate and be distributed that way. This is probably not bring about the result you intended.
Not Having a Contingency Plan. Another thing people don’t think about, is that a beneficiary may predecease them. This can present a problem with the family, if the beneficiary form does not indicate whether it is a per stirpes or per capita election. This is the difference between a deceased beneficiary’s family getting the share or it going to the other living beneficiaries. It’s always best to list a primary beneficiary and at least one secondary (or contingent) beneficiary.
It’s smart to retain copies of all communications when updating beneficiary designations in hard copy or electronically. These copies of correspondence, website submissions and received confirmations from account administrators should be kept with your estate planning documents in a safe location.
Remember that you should review your estate plan and beneficiary designations every few years. Sound estate planning goes well beyond a will but requires periodic review. If this is overlooked, something as simple as a beneficiary designation could create major issues in your family after you pass away.
Reference: Kiplinger (March 4, 2020) “Beneficiary Designations – The Overlooked Minefield of Estate Planning”