So, you have met with a local estate planning attorney and have updated you and your spouse’s wills, durable power of attorneys, and each of your end of life wishes regarding the taking of extraordinary measures on your behalf by your medical professionals. You have also established trusts to protect your beneficiaries from themselves, but you may have committed an egregious oversight without even knowing it: forgetting to update your beneficiary designations for your retirement plans at work, IRAs, life insurance policies, mutual funds, bank accounts, brokerage accounts, annuities and 529 college savings plans.
If your beneficiary designations are out of date and you die without updating those designations, your assets could go the wrong people — a former spouse, for example — no matter what your will says. It is always a good idea to review these designations every few years and change those that are outdated. I suggest that you always name a contingent or secondary beneficiary who will become the primary beneficiary in that event that your primary beneficiary dies before you do.
Helen Modly, a wealth manager and Executive Vice President at Focus Wealth Management, stated recently that “Beneficiary designations that are inconsistent with your will can wreak havoc on a well- structured estate plan.”
The havoc usually is generally unintentional, but not always. “I’ve seen children get themselves named as beneficiaries on their parents’ accounts, thereby invalidating the parents’ will and effectively disinheriting their siblings,” said Modly.
When you name a beneficiary of your IRA account, it is always a good idea to designate a specific individual by name, rather than by class, such as “all my living children.” By naming your heirs individually, upon your death, they are enabled to stretch out their RMD withdrawals from the IRA based on their individual life expectancies, thereby protecting tax deferred growth in the account for as long as possible. Failure to name each beneficiary individually will require your beneficiaries to withdraw their share of your IRA over no longer than five years after your passing.
Here are six events that call for a review of one’s beneficiary designations:
1. Divorce or remarriage. If you had named a former spouse as the beneficiary of a life insurance policy on your life, you will need to complete and submit a beneficiary change form to the issuing insurer to not disinherit your new spouse. Naming your new spouse in your will simply won’t suffice.
2. You have gone to work for a new employer and have rolled over your old 401(k) values to an IRA or to your new employer’s 401(k) plan. If you want to keep the same beneficiary designations, you should name them on your new account(s).
3. Your primary beneficiary recently passed away. Hopefully, you had named a secondary beneficiary and that person is now your primary beneficiary, but whatever the case, you should make certain that your ongoing designations are in keeping with your current wishes.
4. Your financial institution has changed ownership. Be sure to check that your beneficiary designations are still intact and reflect your current wishes.
5. You have a new child or grandchild that you want to provide for. In South Carolina, the magic age is 18, so if your new addition is younger, you should consult with a knowledgeable estate planning attorney and create a trust for the child and name the trust as a beneficiary.
6. One of your beneficiaries becomes disabled. In this event, you should have an attorney establish a special needs trust for that person, naming the trust as a beneficiary. In this way, you will not jeopardize the disabled person’s eligibility for Social Security disability benefits. Having the trust named as your beneficiary effectively removes the inheritance from that person’s “countable assets” for Social Security purposes.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at firstname.lastname@example.org.