Why Reviewing Your Account Beneficiaries Matters

It is normal to assume, and to act as if, you will always be around to take care of family and friends. But if you have had a parent, a close friend or even a child pass away, you start grasping the hard reality that you will not be around forever. In addition, if you were in charge of handling that person’s affairs after death, you begin appreciating an organized and up-to-date estate plan.

One important area to get in order is the named beneficiaries on your life insurance policy and certain financial accounts. It is very common to set up beneficiaries when you first purchase life insurance, open an IRA, or enroll in your company’s 401(k) plan. You simply complete the beneficiary section of the application forms and name someone, based on your current circumstances, to inherit your insurance benefit or account balances. As life evolves, you may not think about the need to change named beneficiaries.

A beneficiary is a person or entity, such as a trust, that will receive insurance proceeds or the assets in an account upon your death. Retirement accounts such as IRAs and 401(k)s typically require you to designate beneficiaries. There are two categories of beneficiaries: primary and contingent. The primary beneficiary is the first person in line to get your assets. The contingent beneficiary will receive the assets if the primary beneficiary is not living. You can name multiple primary and contingent beneficiaries. For example, you may name your spouse as the primary beneficiary, to receive 100 percent of the account’s assets, with your three children as contingent beneficiaries, each to receive 33.3 percent if your spouse has predeceased you.

You can also add beneficiary designations or something similar to other accounts and property, such as your bank accounts, individual investment accounts, homes and autos. Another way to make sure assets pass to a specific person is to make them a joint owner of the account or asset. However, if someone is a joint owner, that person has current rights to the asset or money. If you only want someone to receive assets after your death, naming them as a beneficiary is the way to go.

What happens if you have a will or trust that also governs where your assets are to go upon your death? In general, that document will apply to insurance policies and financial accounts that do not have beneficiaries listed. Assets directed to an account’s named beneficiary typically will override whatever you state in your will or trust. If you update your will or trust but do not change your named beneficiaries, your assets may not pass down as you wish.

Let’s look at a hypothetical. Steve and Mary just got married, both for the second time. When their previous spouses passed away, they each had named their children as primary beneficiaries on their life insurance policies and IRAs. But they now agree they want their assets to take care of each other for as long as either of them is alive. They updated their estate documents to leave everything to each other first and then equally to all the children. However, they did not update the beneficiaries on their life insurance or IRAs in a timely manner.

Mary died unexpectedly and Steve assumed he had plenty of money to live on, as her will left everything to him. He got an unpleasant surprise when instead her children received her life insurance proceeds and all the assets in her IRA account.

Consider another hypothetical. Max and Debbie do not have children and plan to leave all their assets to their siblings when both of them are gone. For ease, they named Max’s brother as the sole beneficiary on all their accounts and life insurance policies, as well as executor of their estates. They wrote a letter to their files that explained they expected him to split up everything equally among all the siblings. They did not realize that, legally, all their assets will go to him and that he has no obligation to in effect donate his assets to anyone else.

Check your beneficiaries and make sure they line up with your wishes and the provisions in your will or trust. Plan as if you may not be around tomorrow, and do not procrastinate in getting everything up to date.

This commentary originally appeared March 30 on CasperStarTribune.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

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Connie Brezik, CPA/PFS, CFP®

As a wealth advisor at Buckingham Strategic Wealth, Connie works with clients to form a comprehensive financial plan tailored to their individual circumstances, one that includes portfolio management, tax strategies, wealth transfer considerations, retirement analysis and education planning. She welcomes the chance to help clients work through difficult situations, finding solutions that they may not have thought of and guidance about what to do if their plans don't work out as anticipated.

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