It was a Thursday evening and one of our clients received a call from a local estate attorney. The attorney was calling to inform her that she just inherited a large portion of her ex-husbands 401k. Having been divorced for nearly 15 years, and with her ex-husband being remarried, it was a surprise to say the least! At first, she thought it was a scam..... it wasn’t. When she asked how this was possible, the attorney responded she was a beneficiary of record. It was then apparent to her that her ex-husband never changed the Beneficiary Designation on his work-place retirement account. Without too many graphic details, the case was taken to the court system by the man’s current wife who lost her plea. In their state, the courts have (and still have) taken the position that employer plan beneficiary designations “are what they are” and the courts cannot interpret intent post death. In short, the ex-wife got the money. The current wife got the legal bills.
The “takeaway” from this is DO NOT ASSUME anything when it comes to beneficiary structure. The laws and process for employer plan (pensions, 401K, DB plans) are state specific and vary widely. Some states are very “black and white” and some are very interpretational. We tell our clients in no uncertain terms that they MUST gather and review all appropriate beneficiary forms as part of the financial planning process.
So, what is a “Beneficiary Designation” and why does it exist? Because of their nature, financial accounts and insurance products use a beneficiary designation to ensure timely movement of a financial asset upon the death of the owner or named insured. A practice that started thousands of years ago, it has remained essentially unchanged. Back in the day, Wills were for the very rich and the bene designation ensured money was handled correctly by the masses. It is the one financial topic that we see over and over as being misunderstood by most people.
Where else do beneficiary designations apply? IRA’s, 401K, 403B, SEP, all forms of employer deferred compensation accounts, life insurance, annuities, various life products. Lots of financial accounts and products have them and they are often filled out upon opening the account and never revisited. Because they aren’t important until somebody dies, people don’t know they are in error until it’s too late. Similar to our last topic on “Titling of Assets”, beneficiary designation is a critical part of your estate and financial plan. They can also be important as to how OTHER PEOPLE have theirs structured. Your husband, significant other, business partner, and parents, may have financial assets that will move upon their death which could impact you greatly.
Important things to know when it comes to beneficiary designations. You cannot change or supersede a beneficiary designation through a will or trust. In our example above, there was nothing that the ex-husband’s current wife could do to over-rule the assets being disbursed to the beneficiary of record. The custodian of your retirement assets or life insurance policy will only look at the beneficiary designation in its files. Plan or asset custodians are not in the business to interpret what someone meant postmortem. The courts, in general, have taken the same position.
Getting to the point, review your beneficiary paperwork every so often. Same with those who impact you with theirs. Might be awkward, but connecting in parents, significant others, business associates, etc. in the conversation might make sense based on your circumstances. Married couples should to this initially and update it when they re-visit their estate planning. We recommend that every 5 years at a minimum. Assess any asset with a beneficiary designation and make sure it is consistent with your short and long-term estate planning objectives.
If you have any particular questions or would like to discuss your plan in greater detail, we are here to help. We can walk you through the process of reviewing your beneficiary designation and help discuss the “what if’s”. Hopefully, this has given you food for thought and given you some insights as to how it applies to your situation.