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How to Avoid Beneficiary Mistakes

Assigning a beneficiary to your account is easy. Getting it right can be more complicated than you think and a mistake can be costly to your loved ones.

Consider the “horrible” experience a widow shared with WBAL TV.  Judith Kiefer’s husband died unexpectedly in his sleep at the age of 56 leaving her a single parent of their two daughters. She soon discovered that she was not the beneficiary of his $250,000 pension.  Prior to their marriage 24 years earlier, Mr. Kiefer named his brother and sister as beneficiaries.  They received the quarter-million dollars.

Most plans require the spouse to be the beneficiary, however, her husband was employed by the University of Maryland and the law does not apply to pension plans for state or local government employees. (NY Times)

Today, investors have the option of naming beneficiaries directly on an increasing number of financial products. When you die assets in your accounts go directly to your beneficiaries named on those accounts, bypassing the sometimes long and costly probate process.

The problem is it’s easy to forget which accounts have beneficiaries and you may have forgotten who you named as the beneficiary.  This may result in unintended consequences for your heirs.

No beneficiary assigned may leave the state to decide who receives your assets

“If an account owner does not assign a beneficiary, upon his or her death the state may decide how the account is distributed and may leave it to someone they didn’t intend to receive it”, according to Catherine Shell, an estate planning attorney in Colorado Springs, CO.  “Without a beneficiary the account may go through the probate process and probate in Colorado averages 9 to 24 months”.

Beneficiary assignment overrides your Will

But what if you have a Will that clearly spells out who will be the recipient of your assets when you die?  A swish of your pen can change that.   “The most important aspect in estate planning is to ensure that your beneficiary designations coincide with your Will.  For example, if someone were to remarry and provide in a Will that everything went to their spouse but left their insurance beneficiary designations to their children, then the beneficiary designation would override the Will and the children would receive all the life insurance proceeds to the exclusion of the new spouse”, says John Stinar, an estate planning attorney in Colorado Springs, CO.

401(k) rights trumped by ERISA

Your 401(k) goes to your spouse.  That’s federal law.  If you want your children to receive it, your wife or husband has to waive their right to it.

Leonard Kidder’s children watched their father’s new wife of six weeks walk away with the $250,000 their father had spent twenty years socking away in his 401(k) plan, the WSJ reports.  The Kidders’ parents had been married for 41 years.  When their mother died, Mr. Kidder made his children beneficiaries of his account.  He eventually re-married.  Six weeks later he died.  The courts ruled in favor of his wife since she had never waived her rights as the beneficiary.  She received $250,000 and his children nothing.

No spouse?  Your 401(k) goes to the beneficiary listed.

Mr. Stinar shares a situation whereby a woman was married at the age of 35 and divorced at 45.  She never removed her ex-husband as the beneficiary of her 401(k). She died leaving $1.8 million.  The state of Washington law would have eliminated her ex-spouse and given the money to her parents who were listed as contingent beneficiaries.   However, federal law governing 401(k) plans required the money to be given to the person listed as the beneficiary when the account owner is not married.   The ex-spouse received the 401(k) and chose not to share with her parents.

IRAs governed by state law

You can generally name anyone you want as a beneficiary on an IRA account.  What if you designate your spouse as your IRA beneficiary and later get divorced? Under most states laws, the designation would become null and void upon your death, unlike with 401(k)s, says Robert Keebler, a CPA in Green Bay, Wis. Your assets will pass according to the default plan laid out in the IRA document—typically to your estate if you are single, he says.

What does “per stirpes” mean?

There is a box you can check on the beneficiary form with the words “per stirpes” next to it.  By checking this box you are stating your account is to be split equally among your beneficiaries by generation.  As an example, Ben, the father of Sally & Nick, checks the box for per stirpes on his beneficiary form.  Sally is married with two children.  She predeceases her father.  When he dies, Nick will receive 50 percent of the account and Sally’s children will equally share the other 50 percent.

If the father had designated 50% to each child, no per stirpes, Nick would have received 100 percent of the account as the only living beneficiary.

What types of accounts allow beneficiaries?

  1. Savings bonds
  2. Bank accounts and CDs called Payable on Death accounts (POD)
  3. Taxable investment accounts called Transfer on Death accounts (TOD)
  4. Life insurance policies
  5. Pension plans
  6. Retirement plans: 401(k) and IRA

What should you do?

Review your beneficiary assignments every few years.  If a major life change occurs, such as a birth, death, marriage or divorce, it is definitely time to update the beneficiary form.

When you make a beneficiary change, check with the financial institution to be sure they have received and recorded it.

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