Time To Check Your Beneficiary Designations


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If you're finally getting around to writing that will or just doing the periodic review, don't forget to check your named beneficiaries on other documents.

If you don't, your assets might not wind up where you want after your death.

That's because some assets go to beneficiaries you've named in individual account documents. Those trump whatever is in your will.

A worker named John Hunter participated in his employer's retirement plan. He named his wife as beneficiary, but no backup.

After she died, Hunter did not name a replacement beneficiary. Then Hunter died without anyone designated to inherit his account.

Hunter's company plan had a formal procedure for deciding who will inherit in such cases. A surviving spouse would be first choice.

Then would come surviving children, parents and siblings, in that order. Hunter had no surviving children or parents, so the plan administrator divided Hunter's account, worth over $300,000, among Hunters' siblings.

But Hunter had two stepchildren from his marriage. He left his estate to them in his will. So the stepsons sued to get Hunter's retirement account. They won one court victory but lost on appeal.

The appellate court held that the plan administrator acted properly. Plan documents did not say that stepchildren were beneficiaries, and they could be excluded.

"This shows the importance of beneficiary designation forms," said Beverly DeVeny, a consultant with retirement expert Ed Slott.

The Right People

To be confident that your retirement money will go to the right people, you should name a secondary as well as a primary beneficiary and review the form periodically.

The ruling on Hunter's plan echoed a unanimous Supreme Court decision. A corporate employee had been divorced, and his wife waived her interest in his company retirement plan as part of the settlement.

But the divorced employee never changed the plan's beneficiary designation. He died years after the divorce and the plan paid out the money to his ex-wife, who was still named on the form.

The employee's estate sued and lost in the Supreme Court. "The documents control," the Court noted. And that's the message you should keep in mind.

The types of accounts and plans steered by this rule include life insurance policies because death benefits go to named beneficiaries. The same is true for annuities, IRAs and other retirement plans.

Some bank and investment accounts are payable-on-death or transfer-on-death. Their balances go to the named beneficiary. Be sure they reflect your current wishes.

Avoiding Probate

When accounts or insurance proceeds pass to a designated beneficiary, probate isn't involved, which can save your estate or heirs time and legal costs.

Insurance policies and accounts with beneficiary designations often hold sizable amounts. Leaving these assets outright to a loved one might not be a wise choice.

Things to consider before you do include whether the beneficiary is a spendthrift, who'll fly through an inheritance. Or that person might not be able to make savvy financial decisions.

If you have such concerns, consider naming a trust as the account or policy beneficiary. A trustee can protect your loved one, the beneficiary, as well as provide cash flow.

For retirement accounts, some trusts can stretch out required minimum distributions over an individual's life expectancy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Mutual Funds
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