Here’s a question: Do you remember filling out the beneficiary designation form for your retirement account or life insurance?
While many people diligently contribute to these funds and policies, the seemingly simple task of reviewing and updating designated beneficiaries is all too often left undone.
As we all know, life is dynamic, marked by big changes such as marriages, divorces, births and deaths. Regularly reviewing and updating beneficiary designations is a proactive way to align your estate plan with your current circumstances. Failing to update beneficiary forms could lead to unintended consequences, such as ex-spouses receiving assets or funds being distributed unevenly among heirs.
It is important to note that while a will and trust are essential components of an estate plan, they do not govern or control the beneficiary designations on retirement accounts and life insurance policies. For example, what happens if your trust states that your assets go to your children and your life insurance beneficiary form still has your ex-spouse listed as the beneficiary? Believe it or not, the beneficiary form overrules your trust, and your ex-spouse will enjoy the proceeds of your insurance policy. Your children can try to contest the beneficiary designation in court, but this process is expensive and not at all guaranteed to succeed.
A will and trust do not govern beneficiary designations on retirement accounts and life insurance policies.
Not naming a beneficiary is another common mistake that results in court involvement. The proceeds from your retirement account or life insurance policy can end up in probate court, even when you have a trust, if you fail to name a beneficiary. The good news is that the process of naming a beneficiary usually takes just a few minutes online with your financial institution or life insurance company. It is time well spent.
Much of the time, knowing who to name as a beneficiary is simple — but what if you have a minor or a disabled beneficiary who is unable to manage his or her own affairs? In that case, you can name a trust as beneficiary on the form, which can funnel the funds into sub-trusts that put a trustee in charge until a minor is old enough to receive them. Or funds can go into a special needs trust for a disabled beneficiary. However, a big word of caution on this is in order because naming a trust without specific provisions can result in tax consequences for retirement proceeds. You need to consult with a knowledgeable estate planning attorney on what to do in your situation to ensure your trust has the proper language to achieve the desired result.
In the intricate tapestry of estate planning, keeping retirement and life insurance beneficiary designations up to date is a vital thread. It ensures that an individual’s hard-earned assets are distributed according to his or her wishes. It adapts to life’s inevitable changes and maximizes tax efficiency. By dedicating time to this seemingly routine task, individuals can safeguard their legacy and provide financial security for their loved ones, offering peace of mind in an ever-changing world.
Stephen Wood is the founder of Wood Law, Wills & Trusts A.P.C. in Newbury Park. He is a State Bar of California Certified Specialist in Estate Planning, Trust, and Probate Law.
