Here’s a question: if you’ve made it clear in your will which of your heirs should inherit money from your estate, how it is possible that those funds will end up going to someone else? The answer is simple: if you’ve forgotten to update the beneficiary information on a life insurance policy, retirement plan, or other financial instrument.
Are Your Beneficiaries Who You Want Them to Be?
A few years back we shared this article from USA Today that carried an eye-catching alert: “Your ex could get rich if you don’t update your beneficiaries.” The same point is made in this much more recent article from Investopedia. “Have you checked your beneficiary designation for your retirement account recently?” this article asks. “If not, you may find that your designated beneficiary is not who or what you think it should be, especially if you have divorced, remarried or had children since your retirement plan account was established. Or if you named a charity as your beneficiary a long time ago, the charity may no longer exist.” Both articles point out that, while most prudent people remember to periodically update wills and other important documents on a more or less regular basis, we tend to neglect something as basic as our retirement account beneficiary designations. “Your retirement accounts are not part of your estate and generally not governed by the provisions of your will,” warns Investopedia, “so it is important to keep these retirement documents updated.”
Therein lies the problem with beneficiary designations that are outdated. “There have been numerous cases of retirement account owners who have been divorced and remarried but have neglected to update their beneficiary designations accordingly,” says Investopedia, resulting in lengthy and expensive court battles and sometimes leading to a legal decision that is not at all what the deceased would have wanted. This problem also arises with children born after the designation forms were filled out, or with offspring from a second marriage. The important thing to know is that beneficiary designations on a 401(k) or IRA are legally binding. As a result, states the USA Today article, they “often take precedence over wishes you’ve put in your will. And that can result in some unpleasant situations if your beneficiary information isn’t updated.”
Your Life Today is Not What It Was Then
The USAToday article quotes financial analyst Charles Sizemore who lays out a very common scenario. An employee establishes a retirement plan and fills out the beneficiary designation form on the first day of a new job. He or she never updates the form for ten, fifteen, twenty years or more, even though much has changed. Sizemore says, “Your life [today] could look a lot different. You might have divorced and remarried, or you might have kids or grandkids that weren’t around back then.” The big downside is clear: you could end up “accidentally leaving your estate to an ex-spouse or disinheriting stepchildren.” If you fail to update your beneficiaries, your financial plans might go out the window.
Both articles advise that we should update beneficiary designations immediately after any significant change in family status. The USA Today article says that there are some life events that should cause you to double check your beneficiary designation, including marriage or divorce; birth of a child or grandchild; death of a previous beneficiary; or when a minor beneficiary comes of legal age to inherit.
Many Financial Instruments are Affected
A whole host of financial instruments may require this type of review, according to USA Today. Along with retirement accounts like a 401(k) or IRA, you should also make sure the beneficiaries are correct on any or all of these:
- 529 college saving plans
- Life insurance policies
- Annuities with a death benefit
- Corporate profit-sharing plans
- Pension plans
- CDs, checking accounts or other bank accounts
- Some stocks, bonds or mutual funds.
Part of a Comprehensive Planning Strategy
If you’ll contact us here at AgingOptions, we’ll gladly review some of these documents and help you make sure your wishes are absolutely clear. Protecting your assets in retirement is a key part of a sound retirement strategy – and part of that protection involves making certain your plans and desires are carried out at every stage of your life as well as after you’re gone. To accomplish this, we work with our clients to help them establish a comprehensive retirement plan called a LifePlan that carefully and thoroughly addresses all of the central issues involved in planning for a sound future: your finances, your legal affairs, your health care, your housing choices, even your family relationships. With a LifePlan in place, you and your loved ones will face the future with greater confidence and peace of mind.
The best way to begin the planning process is by attending one of our free LifePlanning Seminars, held in locations all over the Puget Sound area. You’ll gain a valuable amount of very helpful information in one highly enjoyable, fast-paced evening. Simply visit our Live Events page for a complete calendar of dates and times, or call us during the week for information and registration by phone. We’ll look forward to seeing you soon! Of course, should you wish to make an appointment for an in-person consultation, contact us. It will be a pleasure to work with you to establish a solid plan for your retirement years.
(Originally reported at www.investopedia.com and www.usatoday.com)