You’ve likely done a fair amount of thinking and planning around who should inherit what in the event of your death. You may have even taken the time and care – not to mention expense – to articulate those wishes and desires by stipulating in a Will precisely how your assets should be distributed. Unfortunately, it could all be in vein if you make the common mistake of failing to update your beneficiary designations.
For most of us, aside from our homes, the lion’s share of our wealth is held in retirement accounts (e.g., pensions, annuities, 401k plans and IRAs) and perhaps a life insurance policy. What very few people understand, however, is that when it comes to assets like these that pass to heirs outside of probate, beneficiary designations take absolute precedence over any and all provisions made in your Will.
From joyous occasions such as a marriage or the birth of a child, to difficult and painful events like divorce or the death of a spouse, life changes are inevitable. But each change also brings with it a need to reassess your plans to ensure they reflect your wishes.
Having a bad heir day
In Kennedy Estate v. Plan Administrator for the DuPont Saving and Investment Plan, the U.S. Supreme Court ruled that an ex-wife who specifically waived her interest in her former husband’s retirement savings plan as part of the divorce decree was entitled to his entire account value ($400,000) upon his death because the husband, assuming the divorce decree would be binding, had failed to change the plan beneficiary to his daughter who was his sole heir.
And case law is littered with a multitude of other high court rulings where intended heirs have been effectively disinherited because of outdated beneficiary designations. From young workers who initially name their parents as retirement plan beneficiaries and subsequently never update the designation when they marry, to remarried widows/widowers who intend to leave their retirement plan or insurance policy assets to their children from the first marriage, but the beneficiary was never updated from the deceased spouse, so the assets all go to the new spouse.
Avoid the pitfalls
Estate planners typically recommend reviewing your retirement account and life insurance policy beneficiary designations at least every couple of years (or anytime an important life event occurs). Often, you can conduct a review and make necessary changes in a matter of minutes, as these forms typically can be accessed and submitted online. Consider adding a secondary or contingent beneficiary in case the primary beneficiary dies. And, if you decide to designate more than one primary beneficiary, make sure you indicate what percentage of the assets should go to each.
In addition to making sure your assets are distributed according to your wishes, designating individual beneficiaries assures that those assets will go directly to the individuals without having to go through the cost and delays associated with probate. And you just may realize that the person named on the beneficiary form(s) for your IRA, annuity or qualified retirement plan isn’t who you thought or wanted it to be.
Check in with your SunTrust Investment Services, Inc. Financial Advisor. He or she can help you determine how to do a beneficiary review.