Beneficiary forms overrule last will and testament wishes for assets.
A last will is an important estate planning document.
It is used to name executors, designate guardians for minor children, and provide instructions for distributing assets.
When an estate plan is referenced in news articles or television shows, only the last will is typically addressed.
As a result, many falsely believe this document is equivalent to a comprehensive estate plan.
According to a recent The Wall Street Journal article titled “Your Will Alone Won’t Guarantee Your Money Goes to Your Heirs,“ this inaccurate belief can lead to significant issues.
Consider a man who was left by his third wife.
After the divorce, he promptly updated his last will and estate planning documents to cut her out.
He wanted to ensure his ex received nothing.
Unfortunately, his handwritten note to the life insurance company via fax was insufficient for updating his beneficiary forms.
Upon his death, the children of this man were left to battle his ex for the life insurance proceeds.
Why was his last will insufficient to provide direction on his life insurance policy?
Like in the classic game of rock, paper, and scissors, certain documents “win” over the last will.
What are these?
Well, since I already let the “cat out of the bag,” you probably guessed that beneficiary forms are a winner.
Certain assets like life insurance, retirement accounts, some bank accounts, and some investment accounts pass through beneficiary forms.
Whether the account was opened individually by you or through a workplace, this is common.
Neglecting to update beneficiaries properly with the account provider can lead to dire consequences like an ex inheriting from you.
Because Americans tend to have many accounts, keeping track of where and when beneficiary forms have been updated can become an issue.
Even if your workplace wants to give the assets to the loved ones who have reached out for a transfer, it cannot legally do so.
The request must be denied unless the beneficiary forms directly name the recipient.
People need to review beneficiary forms regularly to ensure they align with their current wishes.
Depending on the account, there may be restrictions regarding who can be named as a beneficiary or whether a beneficiary will be recognized.
This is true of pensions and certain retirement accounts.
Consider a scenario with a 401(k).
The owner of the 401(k) divorces and names an adult child as the beneficiary.
After a few years, the owner of the 401(k) remarries.
When this individual dies, under the federal law known as ERISA, the new spouse must inherit the 401(k) even though the adult child is listed on the beneficiary forms.
For the spouse to not be the automatic recipient of a 401(k), the spouse must formally waive the right with a notarized waiver.
If there is no spouse and no beneficiary listed on the 401(k) account, the employer plan documents provide instructions for who is next to inherit.
Does this rule apply to IRAs?
In most states, this spousal rule does not apply to IRAs.
You can name whoever you want unless you live in a community property state like Texas or California.
In community property states, you will also need a waiver to name another person as the beneficiary of the account.
If no name is listed on the beneficiary form for the IRA, the asset will be distributed according to the terms of the IRA agreement.
If life insurance is a workplace policy, the employer plan documents will determine who receives the payout when no beneficiary is listed.
If the policy was purchased independently, the insurance company rules provide direction.
Even with these guidelines, many policies enter into litigation in state court.
It is possible to prevent these unfortunate scenarios.
Rather than forgetting your beneficiaries, update the plans and include the proper full legal name, date of birth, and Social Security number for each beneficiary.
When making changes to the beneficiary forms, follow the guidelines of the institution.
Although some states may automatically revoke the rights of a divorced spouse, it is best to be safe and update your designations.
Investment and bank accounts often have a “payable on death” designation available when a special form is completed.
If you name one child and forget to add the others as they enter the family, you could trigger resentment and hurt feelings.
When naming beneficiaries, be sure your choices align with your comprehensive estate planning strategy.
By keeping copies of your beneficiary forms with your estate planning documents, you can easily update and review these together.
When returning your forms to an organization, you may choose to include a stamp and ask for a note or copy with a stamp indicating the forms were received.
Sometimes, you can view beneficiary designations online in your account portal to ensure updates have been made.
Keeping these documents updated is the responsibility of the policyholder.
As the adage goes, if you fail to plan, then you plan to fail.
Reference: The Wall Street Journal (Sep. 30, 2023) “Your Will Alone Won’t Guarantee Your Money Goes to Your Heirs“