One Estate Planning Document Most Boomers Forget
Beneficiary designations are more powerful than wills or trusts, but many completely overlook it when planning their estates. That’s a potentially huge mistake that could send a significant amount of assets to someone other than your preferred heirs.
Although it’s easy to overlook, the good news is that it’s also easy to fix.
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Where Your Will Comes Up Short
Most people think that wills control all assets in an estate and direct where they should go. But wills have zero authority over retirement accounts, life insurance policies and annuities. Those pass directly to whoever is named on their beneficiary forms. This is true regardless of what your will says, or what everyone assumes may happen.
This isn't a gray area. It's settled federal law, and the Supreme Court has enforced it even when the outcome was flat-out brutal for the family involved.
The Case That Should Scare Every Boomer With an Old 401(k)
A 2001 Supreme Court case, Egelhoff v. Egelhoff, showed in no uncertain terms what could happen with an outdate beneficiary designation.
David Egelhoff had named his wife Donna as beneficiary of his life insurance and pension through Boeing. Two months after they divorced, he died in a car accident, having never updated the forms. As the state of Washington had a law automatically revoking an ex-spouse's beneficiary status upon divorce, everyone involved expected the money would flow to David’s preferred heirs.
But the Supreme Court instead ruled that federal law governing employer retirement plans overrides state divorce-revocation statutes. David's children from a previous marriage sued to get the money and lost. Donna, his ex-wife, kept the life insurance payout and the pension benefits.
Eight years later, the Court reinforced the same principle in Kennedy v. Plan Administrator for DuPont. William Kennedy's divorce decree explicitly stripped his ex-wife Liv of any claim to his retirement plan. However, he never got around to actually filling out a new beneficiary designation When he died, DuPont paid out roughly $400,000 to his ex-wife because the beneficiary form is what plan administrators are legally required to follow.
The IRS specifically confirms that after a divorce, it's entirely on the account holder to file new forms with the plan administrator. Nothing happens automatically. The divorce decree, as far as the retirement account was concerned, was meaningless.
How This Is So Easy To Overlook
You may have opened your IRA or 401(k) plan 10, 20 or even 30 years ago. Over that long of a period of time, life happens. Perhaps you got a divorce from your first wife, or you opened the plan before your kids were born. Whatever the case, the odds are high that your beneficiary designation is out of date.
The Check That Takes 15 Minutes
Pull up every account you own that has a named beneficiary. The most common types are IRAs, 401(k) plans, life insurance policies and annuities. Be sure not to overlook 401(k) plans you may have with former employers.
Check to see who is listed as your beneficiary. If you see an ex-spouse, a deceased parent or nobody at all, request a change-of-beneficiary form from the plan administrator. You may also be able to simply log in to your account and change it directly.
List a contingent beneficiary in addition to the primary one. If your primary beneficiary predeceases you and there's no backup, the account can default to your estate and land in probate. That’s the type of outcome that a beneficiary designation is specifically designed to avoid.
Updating your beneficiaries isn’t a laborious project. In most cases, it should take you 15 minutes or less. But even if it takes a few extra steps, it’s worth it to ensure that your money goes exactly where you want it.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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