24 September 2009
Taking the time now to review beneficiary designations can help you avoid unintended consequences should you die unexpectedly. For example, suppose John and Jane divorce after 5 years of marriage. Although John planned to change his beneficiary designation to his brother Joe, he never got around to it. When he died, his retirement account balance went to Jane, his ex-wife.

Or take Bill. A lifelong bachelor, he had named his two nephews as beneficiaries of his retirement plan. When his niece was born 10 years later, he meant to add her as the third party beneficiary, but time passed and he forgot about it. He died shortly before she was to enter college, when a little financial help would have been welcome. Unfortunately, the entire balance of the plan went to his nephews, who were already financially established and ended up with a large tax bill.

But what if I change my will?

Accounts that typically have beneficiary designations include employer-sponsored retirement plans, individual retirement accounts, life insurance policies, annuities and trusts. The beneficiary designations on these documents override will instructions, and the assets are usually transferred directly to the named beneficiary. So unless you change the beneficiary on your retirement plan, the assets will usually go to the named beneficiary, regardless of what your will instructs.

You may want to name a primary beneficiary as your first choice to receive the assets, and a contingent, or secondary beneficiary, to receive the assets if your primary beneficiary is no longer living or disclaims the property distributable to him or her for tax reasons. You may even name a charitable organization, if you choose. Keep in mind, in most cases; a spouse is legally entitled to be beneficiary of your retirement account unless he or she signs a waiver.

When should I review beneficiaries?

Consider reviewing your beneficiary designations at least once a year, and update them as necessary. In addition, the following life changes may signal the need to update a beneficiary:
  1. Marriage
  2. Divorce
  3. Additions to your family (childbirth, adoption, stepchildren)
  4. Retirement
  5. Death of a family member or beneficiary
  6. Significant change in your financial status
  7. Significant change in the financial status of a previously named beneficiary

To update the beneficiary, simply contact your plan sponsor or administrator for the proper paperwork. Keep a copy for your own records so that you can easily review and change your designations in the future.

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Topic: Advice