You’ve probably done a fair amount of thinking and planning around who should inherit what when you die. Maybe you’ve even taken the time and care—not to mention expense—to document those wishes and desires in a will. But if you make the all too common mistake of forgetting to update your beneficiary designations, it could all be in vein.
Aside from their home, the bulk of most people’s wealth is held in retirement accounts such as 401(k) plans, IRAs, pensions and annuities (and perhaps a life insurance policy). What very few people realize, though, is that when it comes to assets like these that pass outside of probate, the beneficiary designation on the account or policy takes absolute precedence over any and all provisions you may have stipulated in your will.
From joyous occasions such as a marriage or the birth of a child, to difficult and painful events like divorce or the death of a spouse, life changes are inevitable. But each change also brings with it a need to reassess those beneficiary designations to ensure they still align with your wishes as to who should inherit what assets.
Having a bad ‘heir’ day
In Kennedy Estate v. Plan Administrator for the DuPont Saving and Investment Plan, the Supreme Court ruled that an ex-wife who had previously waived her interest in her former husband’s retirement savings plan as part of the divorce settlement was entitled to his entire account value ($400,000) upon his death because the husband (assuming the divorce decree was binding) never changed the plan beneficiary to his daughter who was his sole heir. And case law is littered with lots of other high court rulings where intended heirs have been effectively disinherited because of outdated beneficiary designations.
- There are workers who initially named a parent as their retirement plan beneficiary when they just started out, but then forget to update the designation years later when they married.
- We often see remarried widows/widowers who intend to leave their retirement plan or insurance policy assets to adult children from the first marriage. But their deceased spouse is still the named beneficiary, so all the assets end up going to the new spouse.
Avoid the pitfalls
Estate planners typically recommend reviewing your retirement account and life insurance policy beneficiary designations at least every couple of years (or anytime an important life event occurs). Often, you can conduct a review and make any necessary changes in a matter of minutes with the required forms accessed and submitted online. Also, consider adding a secondary or contingent beneficiary just in case the primary beneficiary dies. And, if you decide to designate more than one primary beneficiary, make sure you indicate what percentage of the assets should go to each person.
In addition to making sure your assets are distributed according to your wishes, designating individual beneficiaries assures that those assets will go directly to the individuals without having to go through the cost and delays associated with probate. And you just may realize that the person named on the beneficiary form(s) for your IRA, annuity, or qualified retirement plan isn’t who you thought or wanted it to be.
Ready to conduct a thorough review of your beneficiary designations or address other estate planning needs?
Talk to your Truist Wealth advisor.