When was the last time you checked bank and financial account beneficiaries? For many people, these critical decisions are made once and forgotten. That can be a problem.
What is a Beneficiary Designation?
When you open bank, investment, and insurance accounts, you are asked to name a beneficiary and contingent beneficiary. You can usually name more than one of each type. In the event of your death, the beneficiary will become the owner of the account or the recipient of insurance proceeds. If the beneficiary is no longer alive, the contingent beneficiary will become the owner or receive the proceeds.
Types of Accounts Where a Beneficiary Can Be Named
- Bank accounts
- Brokerage firm accounts
- Tax-favored retirement accounts (IRAs, 401(k) and 403(b) plans)
- Company benefit plans (Defined Benefit and HSAs)
- Life insurance policies
- 529 college savings accounts
When these accounts are opened you will be asked to name the beneficiary on the form. Don’t skip this designation. As you will see in the examples below it can make a huge difference. It is also important to check the account beneficiary every year or so to confirm the correct individuals are named.
There are two U.S. Supreme Court cases where the majority ruled that a beneficiary designation superseded a decedent’s will or trust. In one case, the will clearly stated that an automobile accident victim’s children should receive all of his wealth and benefits. Unfortunately, he forgot to change the beneficiary on his corporate pension plan and life insurance. His divorced wife received the proceeds. The Court ruled in her favor over the children’s claim that they should rightfully receive the assets.
In another case, an ex-spouse collected $400,000 from the decedent’s company savings and investment plan even though the ex-spouse had explicitly waived any interest in the plan under the divorce agreement. Believing the divorce agreement was the last word on the subject, the decedent failed to turn in the form to officially change the plan beneficiary from his ex to his daughter. He died seven years after the divorce. The company plan document stipulated that beneficiaries could be changed only by submitting the required form. The Supreme Court unanimously ruled that the outdated beneficiary designation trumped the divorce agreement. So the ex-spouse got the $400,000, and the daughter received nothing
Reasons to Review Your Beneficiaries
- Birth or adoption of a child
- New marriage
- Death in the family
- Designated beneficiary dies
- Moving out of the state or country
- Minor beneficiary reaches the age of 18
- Becoming the caretaker of an elderly parent
- When your bank or financial institution updates its computer systems, the beneficiary designations may not transfer to the new system
Accounts with Beneficiaries Bypass Probate
Another big reason to designate beneficiaries and keep them up-to-date: it avoids probate. This allows your loved ones to receive your assets quickly without having to go to court and deal with the complications of probate.
How to Update Beneficiary Forms
In many cases, you can go to the institution’s web site and download the necessary forms. If not on the web site call the firm.
Bank and Brokerage Firm Accounts — Fill out and submit a transfer on death (TOD) or payable on death (POD) form to name or change beneficiaries.
Tax-Favored Retirement Accounts, Employer-Sponsored Benefit Plans, Life Insurance Policies, and Annuities — Fill out and submit beneficiary designation forms to name or change beneficiaries.
529 College Savings Accounts — Fill out and submit a beneficiary change form to change the account beneficiary.
You must fill out the form and sign it yourself. Do not let anyone else complete the form. Errors are always possible. Spelling mistakes and entering the wrong name (e.g., not including a Jr or Sr suffix) may invalidate the beneficiary designation. It has happened where a client wanted to change the beneficiary on a single account, but the institution changed all his accounts to have the new beneficiary. Filling out the documents yourself can avoid any problems.
Also, consider naming contingent beneficiaries. These are individuals who stand in line behind your primary beneficiaries. The contingent beneficiary automatically becomes the beneficiary upon the death of the original beneficiary.
Special Considerations for Community Property States
In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), your spouse’s consent may be required to make beneficiary changes to investment and financial accounts. These states follow the rule that most assets accumulated during the marriage are considered to be owned 50-50 by the spouses.
The bottom line, make it a practice to review your beneficiary designations at least every two or three years and whenever major life events occur.
For more information on beneficiaries, check out these articles:
The Importance of Updating Retirement Account Beneficiaries
Out-of-date beneficiary designations are a common and costly mistake