Keep Beneficiaries Current

Retirement accounts are often a large part of someone’s estate. It is extremely important to plan who will inherit these accounts.

Even without the changes to the law in 2020, you should review your beneficiaries. This is true for real estate, bank accounts, brokerage accounts, retirement accounts, automobiles, and any other asset that has transfer on death beneficiaries.

All too often beneficiaries on retirement accounts and life insurance policies are overlooked. This can be a big mistake. Remember, any assets that have named beneficiaries will go to that named beneficiary after the owner’s death. The beneficiary designation trumps what is written in a Will. The common example occurs after someone gets divorced. If the owner of the life insurance policy never notifies the life insurance company of the divorce, the life insurance proceeds often go to the ex-spouse. Ex-spouses are rarely intended beneficiaries of life insurance.

It’s not just a divorce that can lead an inheritance to an unintended person. Buried in the fine print of life insurance policies and account agreements is language that covers who will inherit the asset if a beneficiary dies before the account owner. This is called a pre-deceased beneficiary. Sometimes this order of inheritance is based on the law of another state.

IRA Beneficiaries Example

Let’s think about a particular example in the context of an Individual Retirement Account (IRA). Your neighbor Joe has an IRA with a $2 million account value. Joe is single. He has named his three children, A, B, and C, as beneficiaries of his IRA. His child C dies unexpectedly. After C’s death, Joe does not update the beneficiaries for his IRA. As a result, instead of one third of the IRA balance going to C’s children at Joe’s death, Joe’s children A and B each take one half of the balance of Joe’s IRA. This same unintended result can happen with any asset that has an outdated beneficiary designation.

The moral of the story is quite simple. Any time there is a major life change, it is important to update your beneficiaries. Current beneficiaries are just as important as a current will or trust. Contact me to ensure that you pass on life insurance and retirement assets as you intended.