The Power of Beneficiary Designations

Financial assets pass by beneficiary designation – not by your will.  Intentions set forth in a will are secondary to directions recorded in beneficiary designations.  If they are in conflict, the beneficiary designation controls.  For many people, banking, investment and/or retirement accounts may comprise most of their estate – don’t neglect the criticality of these documents, and give special consideration to your intended disposition of your entire portfolio.

Consider a case reported by the WSJ, in which a man’s death resulted in his $1M retirement account being inherited by an ex with whom he hadn’t contacted in years[1].  When starting a new job, most people complete beneficiary forms as part of a slew of other new hire paperwork – and promptly forget about them.  If you stay at your job a decade or more, consider the life changes that may occur:  marriage, divorce, death of your original beneficiary, or a falling out with your original beneficiary.  Don’t fall into the trap of “set-it-and-forget-it.” When it comes to beneficiaries, confirm the designation aligns with your current intentions on an annual basis. Don’t ignore secondary beneficiaries either. This provides added protection in the event your original beneficiary predeceases you, and include as much information as possible about your beneficiaries so tracking them down is not difficult.

Marriage, Divorce, and Changing Circumstances

Workplace 401K accounts legally pass to your spouse if you are married.  If you want to circumvent this, your spouse is required to waive their right – an official document that may require notarization (confirm with your HR department).  On the flip side, it can happen that if you are divorced (and didn’t change the beneficiary designation), a court may overrule your ex-spouse as a beneficiary – even if that was still intended. Your beneficiary forms should be updated in this situation as well to prove that your ex is still your intended beneficiary.

Consider another example where a divorced individual does update beneficiaries to be his/her children post-divorce but then remarries.  Even though the current beneficiary is listed as the children, the new spouse automatically becomes the heir unless he or she specifically waived their interest.[2]

Often Forgotten: Insurance, Cars, and Homes

Life insurance policies – available through the workplace or owned individually – are another key consideration.  If you don’t have a record of what you originally selected, ask your HR department or insurance provider for a copy of the document.  This is another item that is easily forgotten as regular communications from the provider are often scarce.

Don’t neglect such things as titles to vehicles.  Following the death of the owner, car ownership will be decided by the court (probate exercise) in the absence of a beneficiary designation. If you are married, list both names on all car titles.  If you are single, complete a transfer on death form (available through the DMV) to ensure that your intended heir can take ownership without significant complication.

Ownership of homes should also be specifically addressed.  States have varied acceptable documentation but a transfer on death deed (or its equivalent) should be completed for your home if your estate plans do not contemplate your home being transferred to a trust (or they can be used together).[3]  In this case, your heir(s) would benefit from receiving a step up in basis  upon your death which is extremely valuable if the home value has appreciated.  Note that these documents should be completed with a lawyer as there can be nuances to consider.

Guardianship for Minor Children

Parents of young children need to have a plan for the care of their children should parents unexpectedly die while they are minors.  Set this up as soon as possible after the birth of a child – but don’t forget about it!  Eighteen years can bring a lot of changes to your life, your geographic location, and your family and friend relationships.  Revisit this decision

[1] https://www.wsj.com/personal-finance/inherited-retirement-savings-beneficiary-breakup-divorce-849e3ff2?mod=article_inline

[2] https://www.wsj.com/personal-finance/estate-planning-will-money-family-heirs-8f2eb6e8?mod=article_inline#comments_sector

[3] https://www.wsj.com/personal-finance/house-inheritance-transfer-on-death-deed-aa10fc82?mod=Searchresults&pos=14&page=1