When is the last time you checked your beneficiary designations?
It's truly amazing how many people who have divorced spouses or deceased relatives still named as a beneficiary on a retirement account or on a life insurance policy.
That's why it's important that after marriages, divorces, births, deaths and other major life events, account holders need to check and, if necessary, update beneficiary designations.
This is one of the most common and potentially costly retirement and estate planning errors that people make.
The classic worst case is you get divorced, your ex-wife is named as beneficiary and you never change the form. You might have changed your will or trust to leave everything to the kids. But after you die, your IRA, if it's never changed, will go to your ex-wife, not the kids.
Whatever your beneficiary statement says trumps your estate plan. Period.
How to check and change beneficiaries
Beneficiaries for most retirement accounts and life insurance policies can be changed online. For others, account and policy holders need to request the necessary document from the company. It's a very simple process.
Beneficiaries can get more complicated, however. People may name multiple primary or contingent beneficiaries, with a percentage of funds going to each, or leave funds to trusts or charities. As for retirement accounts, the spouse's signed permission is required to name anyone else as a primary beneficiary.
When to check and change beneficiaries
Beneficiary forms should be examined after marriage or divorce of the account\policy holder and anytime there is a family birth or death, especially if a beneficiary dies.
Account\policy holders who fail to make changes after a sole beneficiary's unexpected death frequently cause beneficiary foul-ups.
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If you have no named beneficiaries, either because you never named them or your beneficiaries predecease you, your assets may pass to your estate and be forced through probate, which can be a very costly process.
Additionally, if your IRA ends up going to your estate, rather than a named beneficiary, the estate can be forced to withdraw funds and pay the tax on those withdrawals over a fairly short time period.
The high stakes means beneficiaries should also be checked occasionally even when nothing has changed. Every 3-5 years.
Sometimes after mergers, institutions destroy beneficiary forms from prior institutions. For that reason, account\policy holders should request and retain copies of beneficiary forms and check that the financial institution's information matches.
In addition to IRAs (traditional, Roth, SIMPLE and SEP), beneficiaries should be checked on 401(k) plans, 403(b) and deferred-compensation employer plans, life insurance policies, 529 education accounts and any bank account or other account designated as "Transfer on Death" or "Payable on Death."
Another mistake is naming a minor or other person incapable of managing funds. You need to see an estate planning attorney about such issues.