Check your beneficiary designations annually

Jeff Witz, CFP

Although there is never a bad time to revisit the beneficiary designations on your retirement plans and life insurance, we generally recommend this activity be completed annually. Unfortunately, once various beneficiary forms are completed, they are often forgotten until the time of death. In many cases, executors find that no beneficiaries have been named at all or that the beneficiaries were never updated after one predeceased the account or policy owner. This can often create confusion, anger, and time delays in settling an estate. In other cases, the named beneficiaries may no longer be members of the family because of divorce.

One of the main reasons for this oversight is that many of the financial accounts requiring a beneficiary designation are established earlier in life. There may be a life insurance policy purchased when you were first married, an individual retirement account you opened prior to marriage, or a 401(k) from a previous employer.

Having a sound financial plan dictates you ensure there are designated beneficiaries for all your retirement plan accounts, life insurance policies, and other assets, and that they are the intended recipients based on your current familial arrangement. It is often not as cut-and-dried as it first seems. Following these guidelines can help you avoid the most common mistakes:

Do not leave the beneficiary lines blank. If you don’t name specific beneficiaries for your accounts, or if you name your estate as the beneficiary, your heirs will likely end up in probate court. This can be both time-consuming and costly. If assets go to your estate, they are subject to the reach of creditors. A better option is to choose individual beneficiaries and list them on the forms.

Consider trusts for beneficiaries who are minors. In some states, minors face restrictions until they turn 18 or 21. If you designate a minor as a beneficiary, a court will appoint a guardian to manage the funds until the child reaches the age of majority. Unfortunately, there can be instances in which the guardian abuses this power. Alternatively, you can establish a trust to handle the funds and name the trust as the beneficiary. Thus, you maintain control now and provide asset protection for minors when you are gone.

Additionally, trusts can provide specific rules for how the money can be used until the child reaches a certain age. Many parents have concerns about an 18-year-old coming into possession of a large sum of money. The trust can specify that the money can be used only for things like HEMS (health, education, maintenance, and support) and that when the child turns a reasonable age—for example, 30 years old—they can use all or a portion of the money in any manner they choose.

Understand the key rules. Beneficiary designations on retirement accounts and insurance contracts will override your will. If you want someone other than your spouse to inherit an employer-sponsored retirement account, such as a 401(k) or 403(b), your spouse must sign a written waiver. Without the waiver, a nonspouse beneficiary designation will be invalid upon your death. Nonspouses can be named as the primary beneficiary on individual retirement accounts (IRAs) and life insurance policies without requiring a signed waiver.

Inform your beneficiaries. Do not keep your beneficiary designations a secret. Also, let the people you have designated as beneficiaries know where to find important documents and contact information for your professional advisers. On the other side, make sure your advisers have the contact information for your beneficiaries.

Double-check names and numbers. Make sure spelling and numbers are accurate when completing the beneficiary designation forms. This is particularly important when listing Social Security numbers as well as telephone numbers and addresses. If your beneficiary moves, it is important to update your financial institution with the new address. The easier it is to locate and notify your beneficiary, the less complicated the transfer of assets will be for them.

Designate percentages instead of dollar amounts. For example, suppose your IRA is worth $100,000 at the time you complete the beneficiary form, and you designate a nephew as the beneficiary of $75,000. If the IRA drops in value to $75,000 or below at the time of your death, your nephew gets the entire amount—any additional beneficiaries receive nothing. An alternative way to meet your objectives is to give your nephew 75% of the overall account value and divide the remaining 25% among your other beneficiaries.

Name contingent beneficiaries. If your primary beneficiary has died and you have not updated your accounts with a new primary, the assets would go to your contingent (or secondary) beneficiaries. If a contingent beneficiary was never named, the assets are transferred to your estate, as previously mentioned. Avoid potential problems by indicating contingent beneficiaries in appropriate places. Just like with primary beneficiaries, assigning percentages to your contingent beneficiaries makes good sense.

Finally, don’t stuff all the paperwork in a desk or drawer and forget about it. Make the proper beneficiary designation adjustments when warranted and review these annually with your adviser to ensure they remain up-to-date and make financial sense given your current situation.

MEDIQUS Asset Advisors, Inc. does not provide tax, legal or accounting advice. The information contained in this report is for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction or regarding any questions you may have with respect to this communication.

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