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Why Naming Beneficiaries Is Important

Editor’s Note: How many times have you opened an account and skipped over the beneficiaries section? I know I do all the time. In fact, any one who has an ING Direct account has skipped over that section because that section doesn’t exist! In this article, Jeff Rose [3], a CFP in Illinois, shares a chilling tale of how skipping this section could have disastrous consequences you never envisioned.

Three sons were to be equal beneficiaries from their widowed mom’s estate. She had a modest home, about $100,000 in CD’s at the local bank, and $250,000 in an annuity. The mother named the eldest son executor of the estate. The family had always gotten along and the mother never imagined there would be an issue settling her estate, especially since her wishes were spelled out in the will – each son would get an equal third.

Sounds straight-forward enough, right? Wrong.

One minor item was overlooked and it proved to be the catalyst that drove the three surviving brothers apart.

The mother’s home and CD’s were divided without any problems in accordance of the will. It was the annuity that created the problem. When her husband had passed, she named her eldest son as the primary beneficiary on the policy. When she passed, the eldest son concluded that his mom had intended for him to receive the entire $250,000. So he kept all of the annuity to himself and as well as a third of everything else in the estate. Can that really happen? It can and it did.

Beneficiary Designation

Accounts that carry a beneficiary designation [4] offer one of the simplest and most direct ways to efficiently get assets in the hands of loved ones after your death, but only if you have completed the paperwork properly and the information is up-to-date.

You might be surprised to learn that your will [5] has no authority here. There are more accounts with beneficiary designations than you probably realize. IRAs, company-sponsored retirement plans (401k’s, 403b’s, TSP’s, etc), life insurance policies, Coverdell education savings accounts, and annuities, in trust for and pay on death accounts (TOD’s and POD’s), all have beneficiary designations.

Review Your Primary Beneficiaries

When deployed to Iraq, I almost forgot to change the beneficiary to my wife on my insurance policies. I had listed my parents as equal recipients because I set them before I was married. I would like to think that my parents would have done the “right” thing, but circumstances change when you receive a tax free check for $400,000. Don’t assume that your beneficiaries are correct – double check and make sure.

Contingent Beneficiary as Backup

Make sure you also have named contingent beneficiaries. These are the individuals or institutions who will receive your assets if your primary beneficiary is not available, either because they have predeceased you or because you wish to disclaim part of all your account.

Minors as Beneficiaries

Take care when naming a minor as a beneficiary. Unless the individual has attained the age of majority, which depends on where you live, they are not eligible to own financial assets. If you wish to leave certain assets to young children, such as grandchildren, you should appoint a guardian in your will to oversee these accounts until the beneficiary is no longer considered a minor.

Estate as a Beneficiary

If you don’t have a primary beneficiary or contingent beneficiary on your accounts, either because the individuals you named have died or because you simply specified anyone, your estate will become the beneficiary. In most cases, this outcome is not ideal. Assets left to your estate are subject to delays and costs of probate.  Unhappy heirs can contest the division of property, further delaying its distribution.

Trust as a Beneficiary

While naming a trust as a beneficiary of your account may seem like a simple solution, it can actually add a level of complexity when it comes to IRAs. If you want the beneficiaries of your trust to be able to stretch the IRA [6] distributions  over their life expectancies.

529 plan.

A different but related issue is posed by 529 college savings plan [7]. You should appoint someone you trust who can take over as successor account owner. This position is important because only the account owner of a 529 plan can change the beneficiary and authorize distributions.

It’s essential for you to review and update the beneficiary designations on a regular basis and whenever you have a major change in your personal circumstances, such as divorce, marriage, adoption, the death of a spouse, or birth of a child.

If you enjoyed Jeff’s post, read more of his stuff at Good Financial Cents [8], and subscribe to his RSS feed [9].