Beneficiary forms: The idea seems so simple

Over the course of our lifetime, we will accumulate various forms of “property”.   One of the decisions we need to make about our property is how we want it distributed at our death someday.  This may seem fairly straight forward, yet the concept of transferring property to heirs is a bit more complicated than people often assume.   In reality it’s easy to make some common errors that lead to unintended and unfortunate results.   Here are some of the issues or misconceptions that may cause us problems:

Property transfers to heirs in different ways.  A will is an important tool in transferring property to our heirs, but it’s important to understand that some of our property may transfer via a different route entirely, not controlled by our will.

For instance, life insurance policies, IRAs and employer sponsored retirement plans like 401k plans transfer via their beneficiary designations.  They will distribute the proceeds accordingly, regardless of what our will says.

To make matters more complicated, employer sponsored plans are governed by the Employee Retirement Income Security Act (ERISA), which rules that if the late account holder was married, the surviving spouse is entitled to at least 50% of the account assets. That applies even if another person has been designated as the primary beneficiary.

To make matters just a bit more complicated, real estate and business interests (partnerships, LLCs, closely held corporations) may add a whole new layer of complexity with additional potential distribution paths.

We make decisions over time and things change: 

When we acquire property over our lifetime, the estate or beneficiary decisions are often an afterthought.  We do what is reasonable and expedient at the moment with good intentions of returning to the topic when we have more time.  Sometimes we forget.

Also, as things change in our life (divorce, job changes, deaths) it’s easy to lose track of how these events impact our past decisions.   The result can be arrangements that are at odds with our intentions and that may cause needless cost, tax, and confusion one day.

Lastly, children are sometimes made contingent beneficiaries.  Pension plans, life insurance companies and IRA investment providers will usually not make payments directly to minor children.  Without a named trustee or guardian, complications are created.

What to do:

It makes sense to be intentional about estate planning.  Here are some important steps to consider:

  • Together with your advisors, map out a big picture strategy for distributing your property to your heirs.
  • Create an inventory of all your property and coordinate the beneficiary arrangements with your strategy.
  • Consult with your attorney to update your legal documents.
  • Repeat the process periodically , especially at key life changing moments (marriage, divorce, births, job changes, retirement).

One final word about life insurance.   Recently, the life insurance industry came under criticism because insurers had withheld more than $7.5 billion in life insurance death proceeds from beneficiaries. They had a contractual reason for doing so: the beneficiaries had never stepped forward to file claims.

The deceased policyholders had either failed to tell their heirs about the policies or misplaced the copies and the paperwork. Their heirs did not know (or know how) to claim the money. As a result, the insurance proceeds lay unclaimed for years.  It makes sense to alert the beneficiaries of your decision.

Winfred Jacob, CFP®
Senior Financial Advisor


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