Reviewing the beneficiary designations on your property and assets on an annual basis, or as circumstances in your life change, is one of the smartest financial moves you can make to protect your interests, your legacy and your loved ones.
People often make the mistake of assuming that a will or trust will govern how all of their property and assets will be distributed. However, certain account types allow property or assets to transfer directly to a beneficiary outside of a will or trust and are not subject to the probate process following the account owner’s death.1 These include life insurance policies and qualified retirement plan accounts such as 401(k)s and IRAs as well as accounts or property that are properly designated as “payable on death” or “transfer on death.” Since these accounts are not subject to probate (the court process for settling your estate and transferring property to your heirs), they will be distributed directly to the beneficiaries you’ve designated on each account upon your death.
That makes it really important to keep on top of your beneficiary designations. The last thing you want is for your intended beneficiaries to be disinherited due to an error or oversight or be forced to wait for their money, especially if they rely on it for income in your absence. Beneficiaries are then forced to involve legal, tax and financial advisors to figure out how to distribute the funds when there are no clear instructions, which can also lead to long and expensive family disputes.
Take the case of a divorcing spouse who remarries and forgets to remove his ex-wife as the beneficiary on his IRA. In the event of his death, the IRA account would belong to his ex-wife—not his new wife—even if he had drawn up a new will and/or trust naming his new wife as the sole beneficiary of his estate prior to his death. That’s because the IRA beneficiary designation supersedes any changes made to the will or trust. And challenging that in court can be very costly and time consuming.
The good news is that situations like these are actually very easy to avoid by simply checking beneficiary forms on a regular basis. You also want to review your beneficiary designations whenever your family experiences an important life event, such as a birth, death, marriage, divorce, remarriage, new grandchild, or when changes in the tax law occur that may impact your current estate planning strategy.
If you have questions about naming or updating beneficiaries on your property or accounts, call the office to schedule time for a beneficiary review.