Are Your Beneficiary Designations Up to Date?
By David Albert, CPA, CFP®
Most of us have more than enough items on our to-do list. We are constantly on the move from morning until well into the evening — six or maybe seven days a week. It should come as no surprise to say that we just may miss a few important things. We know we need to get to them, but it seems we just push them off until tomorrow, next week, or whenever.
A U.S. Supreme Court decision reminds us that it’s possible that “whenever” may never get here. And, the results can be catastrophic. The case involved a $400,000 employer-sponsored retirement account, owned by a gentleman named William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple went through a divorce 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. Unfortunately for him, William never got around to changing his beneficiary designation form with his employer.
Years later, when William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Supreme Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.
The unintended and tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This brings us to a couple of important points.
First of all, if you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, you should use the plan’s official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.
Secondly, it is important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated. Today might be a good day to review your beneficiary designations and make any necessary changes. You may not want to wait until whenever.
One final thought regarding beneficiary designations: While you’re verifying that all of your beneficiary designations are up to date, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period of time and maximize the time available for the tax deferral benefits to accrue. Additionally, if the secondary beneficiaries are minors or below the age that you want them to have control of the money, it is appropriate to name a trust as beneficiary for their benefit.
David Albert, CPA, CFP®, is a shareholder in Rubino & Company’s tax practice. He also is in charge of the wealth management practice of the firm and is a practicing attorney. He has over thirty years of experience working with wide range of clients assisting them with complex tax, estate planning, and financial advisory issues.