One of our blog readers wanted to know about beneficiary horror stories. I’m not sure why, but in thinking about it I realized it’s a great way to show the ugly side of failing to update your forms. Sure, I can tell you how important it is, but what motivation would you have? Instead, here is a snapshot of information I found on the internet.
Let’s start with this: The beneficiary form is the most important document when it comes to estate planning. “How can that be?” you may ask. Well, the beneficiary form trumps all other estate planning documents, even a will or a trust. This means any asset you own, for example a retirement account or life insurance, will pass directly to the named beneficiary at your death without the need for a will or probate.
This is amazing when you think about it! And that’s exactly why now is the perfect time to make sure the people named on your beneficiary forms are who you really want. Besides life insurance and retirement accounts, other assets you should check include bank accounts, company pension plans, annuities, and 529 college plans.
Horror Story 1:
An article in the New York Post recounted how a husband lost his wife’s entire $1 million retirement account because her beneficiary form was never updated when they married. All the money went to her sister and nothing to him! His wife had been a teacher in the New York School system and completed the beneficiary form early in her teaching career. After marrying, she never updated the form. Can you imagine how difficult it must have been between the sister and the husband after the teacher’s death? And how difficult it would have been to accumulate such a large nest egg to begin with?
Let’s talk some hypothetical situations
Horror Story 2:
Let’s say you were married for a second time, but divorced long ago. Then you die and your ex-spouse collects your company pension benefits and the proceeds from your company life insurance. You really wanted your children from the earlier marriage to get the money but you never changed the beneficiary designations made years ago. The money goes to your ex-spouse because he/she is the name on the form. It does not matter what you intended or what your will says. Beneficiary forms are the top dog in the estate planning world!
Horror Story 3:
Maybe you become estranged from one of your adult children. Or you might want to leave more of your life insurance benefits to an adult child who became disabled and less to your kids who can better support themselves. Or one of your children just had triplets. You get the idea. When big changes happen in your life, your beneficiary designations may need to change, too.
Horror Story 4:
There’s a situation that can make things even worse. Let’s say you fail to name any beneficiary. In that case, the account becomes an asset of your estate. This means distribution will have to be resolved through the court system. It will also mean hiring a lawyer and likely take lots of time and money. So it’s best to take action now!
If you are married and have accounts set up with your spouse as joint owners with right of survivorship, the surviving spouse will automatically take over sole ownership when the first spouse dies. If that is what you want, perfect. However, you may want to name a contingent or secondary beneficiary in case your spouse dies before you do.
Also, there are nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). If you live in any of these states, assets accumulated during your marriage are generally considered to be owned 50/50. Therefore, you may need your spouse’s consent to make beneficiary changes. Check with an attorney to be sure.
What to Do
- Contact any institution that holds your financial accounts. Either go online or call to request that a beneficiary form be sent to you. NEVER RELY on the information told to you about your beneficiary forms. If you want to make sure the forms are accurate and up-to-date, take care of it yourself.
- Not only should you designate the primary beneficiary, but also a secondary or contingent beneficiary in case the primary beneficiary dies.
- If you decide to name multiple primary or secondary beneficiaries, be sure to assign a percentage or fraction of the proceeds to go to each.
- Bank and brokerage firm accounts: fill out and submit a transfer on death (TOD) or payable on death (POD) form to name or change your beneficiaries.
- Retirement accounts, employer-sponsored benefit plans, life insurance policies, annuities, and 529 college accounts: fill out and submit beneficiary designation forms to name or change beneficiaries.
- Review your beneficiary forms annually or whenever you experience major life changes.
This is just one of those things that isn’t front and center in most people’s minds. Hopefully this post is a helpful reminder to update your beneficiary forms (when needed) so you can continue to take care of your family even when you’re gone.
Check out “5 Expenses that are Worth the Money” (also by Barbara Miller) for more financial priorities.
LSS Financial Counseling is here to help you charge of your finances and conquer your debt. Call us at 888.577.2227 to make an appointment with one of our experienced Financial Counselors. They can help you achieve your financial goals. So don’t wait improve your financial present and future…take action today! You can also get started online with a simple click:
Author Barbara Miller is a Certified Financial Counselor with LSS and she specializes in Bankruptcy Counseling and Education.