Are Your Beneficiary Designations Up to Date?
September 27th, 2016
You've signed your will, funded your trusts, and prepared powers of attorney. You've done everything you need to do to provide for your future and the security of your family—or have you? If you are like many people, you've forgotten to take a look at the assets that many people think of as "set it and forget it:" assets with beneficiary designations. These include life insurance policies and retirement accounts.
The Risk of Failing to Update Beneficiary Designations
Paying attention to your beneficiary designations is essential, as they can override a conflicting provision in your will or a trust. For instance, let's say Jamie took out a $100,000 life insurance policy and designated his parents as beneficiary. He then married Chris, and had a will prepared leaving all his assets to Chris. If Jamie then dies, without revising his beneficiary designation to make Chris the new beneficiary, his parents will properly receive his insurance benefits, and they are under no legal obligation to share them with Chris.
Or, let's say that Jamie does remember to make Chris the beneficiary of his life insurance policy, but then they divorce and Jamie marries Lee. Ohio law used to terminate Chris's interest in the insurance policy upon divorce. However, under current law, Chris will receive 100% of the death benefit and Lee will receive nothing!
When Should You Review Your Beneficiary Designations?
It's a good idea to get into the habit of reviewing your beneficiary designations at least once a year. Some people make a note to do this on the anniversary of their hire date at work. But any major life change should trigger a reminder to take a look at your beneficiary designations: marriage, the birth of a child, divorce, remarriage, and, of course, the death of a current beneficiary.
What happens if your beneficiary predeceases you? If you have not designated a contingent beneficiary, and your primary beneficiary dies, at the time of your own death, your investment account or life insurance policy will default to your estate, and then will need to go through the Ohio probate process. This will almost surely lead to delays in the distribution of the asset, as well as the reality that the asset may go to different people than you intended. If a retirement account ends up going to your estate, the estate will likely pay a 45% income tax rate on the account.
So long as you have not made your beneficiary designation irrevocable (which would mean your beneficiary would have to agree in writing to any changes to the designation), you are free to change it as often as needed.
Considerations When Reviewing Beneficiary Designations
First and foremost, as noted above, it's important to have both primary and contingent (secondary) beneficiaries. This is especially important if you want to keep all of your assets out of probate. Also, be specific when making designations. For example, if you indicate that you want an asset to go "equally to all of my children," and then one child predeceases you, what do you want to have happen to that child's share? You will need to use different language if you want that child's shares to go to their siblings rather than to the descendants of the deceased child.
A surprising number of people designate someone they trust as beneficiary with the confidence that that person, say, their oldest adult child, will inherit and honor their wishes. It's possible that the oldest brother will do what you wanted and distribute the assets equally to his sibling. However, he is under no legal obligation to do so. If he is designated as beneficiary, he is well within his legal rights to keep the assets.
Another consideration, if you are naming multiple people as beneficiaries, is how to describe what they will receive. Avoid using dollar amounts, and use percentages instead. That way, if the total amount in an account changes, especially if it decreases, it will still be clear who gets what.
Lastly, if you have a beneficiary with disabilities or special needs, making them a direct beneficiary could jeopardize their eligibility for needed government benefits. Instead, consider creating a special needs trust or STABLE account, and making the trust or STABLE account the beneficiary of the assets.
You don't need an attorney to make your beneficiary designations, but it's helpful to consult with an experienced estate planning attorney to understand the potential risks and consequences of your designations. If you need guidance regarding making or updating your beneficiary designations, we invite you to contact Gudorf Law Group online or call 1-937-898-5583 today for a free consultation.