How much does having a correct beneficiary designation on a life insurance or IRA account matter? A lot.
The beneficiary designation will always supersede the language of your will. I once met a woman whose husband had just died. He had a will that gave everything to her. However, all of his retirement plans were payable to his ex-wife. After she met with me, she was not a happy camper.
Neglecting to know which assets have beneficiary designations and failing to update the designations can undo even the best estate plan.
The beneficiary designation for your life insurance or retirement account custodian provides an opportunity to tell the company who will receive life insurance proceeds or retirement savings upon your death. This common error is explained in a recent article titled “This Important Estate Planning Step is Often Missed” from Coeur d’Alene/Post Falls Press. If these are not coordinated with an estate planning, including trusts created while living or in your last will and testament, results in problems, at best and worse, financially and emotionally devastating.
This epic fail comes in many forms, but the most common, as I related above, is when a life insurance policy has never been updated, and an ex-spouse receives the policy proceeds. The rules differ between retirement accounts and life insurance and can be impacted by various state and federal laws (and the divorce decree, if the life insurance policy was addressed there). However, for the most part, the ex will receive the proceeds, and litigation will not succeed.
Another common beneficiary designation mistake is when a person has created a trust in their will or their living trust to protect a young or irresponsible beneficiary from wasting the inheritance. Even though their will or trust contains appropriate protections, it won’t matter if they are named directly to receive the account. Worse yet, if nobody is a beneficiary, the assets must go through probate when they die. Probate can take many months to complete, subjects the assets unnecessarily to the deceased person’s creditors, and will be expensive to deliver.
When the living trust is established, and assets are transferred into the trust, those assets do not pass through probate. Trust created in a will can also be the beneficiary of accounts without subjecting the assets to the probate process or its creditors.
However, if a person (or married couple) established a living trust and fails to list both primary and secondary beneficiaries for life insurance and/or retirement accounts, it is entirely possible that the assets will go either unprotected by your planning or pass through probate.
I prepared a will for one young mother who was dying of cancer. We prepared a plan to protect her assets for her eight-year-old son. The will contained a trust holding the funds to age 25. Unfortunately, when she died, one life insurance policy was still payable directly to him. He received the $65,000 at age 18, and it was gone very quickly. The rest of the inheritance was protected until he has some capacity to manage it wisely.
Take the time to make an inventory of all assets and accounts. Determine which ones have a beneficiary designation and find out who is named as the beneficiary. If your retirement accounts and life insurance policies were established decades ago, this is especially important.
Failing to coordinate beneficiary designations with your estate plan could undermine your wishes. Review these items with your estate planning attorney to avoid these and many other potential pitfalls.
Reference: Coeur d’Alene/Post Falls Press (May 23, 2022) “This Important Estate Planning Step is Often Missed”