By Andy Ives, CFP®, AIF®
Regardless of whether you open an IRA, participate in a 401(k) plan, buy a life insurance policy, or start a college saving plan for a child, there is a critical detail which should never be overlooked: naming a beneficiary. Typically, the account application will include a space for doing just that. Sometimes a second form may be required when a person wants to change an existing beneficiary.
Despite what appears to be a basic piece of information – “Who is your beneficiary?” – and despite the ease of writing in another person’s name or a charity to inherit assets after the death of the account owner, beneficiary forms are constantly overlooked, lost, or mishandled. Time and again the beneficiary designation section is left blank. Time and again people fail to update their beneficiary forms after a major life event.
Did you get married or divorced? You should review your beneficiary forms for a possible update. Did your spouse predecease you? Review your beneficiary forms. Are your children now grown and mature enough to handle money? Did someone develop an addiction problem and can no longer be trusted with money? Did a beneficiary reveal himself to be unworthy of your assets? Did you identify a charity that you want to support? Review your beneficiary forms.
Also, do not assume a beneficiary form is on file at the bank or with the custodian that handles your account. While most institutions do their best to maintain accurate records, forms occasionally get lost. Ultimately it is your responsibility to designate a beneficiary, to ensure the designation stays current, and to provide that information to your next of kin.
Example: Ron, age 60, is having a difficult year. He divorced from his wife, and his adult son developed a substance abuse problem. Ron’s now ex-wife and son are listed on all his accounts as primary and contingent beneficiaries, respectively. Despite his heartbreak, Ron reviews his beneficiary forms. He elects to change his IRA beneficiary to a charity that assists those with addiction issues. He also changes the beneficiary on his 401(k) and on a life insurance policy to a trust that will control the assets for his son after Ron’s death.
If a person fails to complete or update a beneficiary form, we are forced to look to the default beneficiary as indicated on the custodial form or plan document. With a default beneficiary, the organization in charge of the account essentially dictates who receives your assets after death. This could be the estate, or a succession of possible beneficiaries could be delineated. For example, plan documents often list a sequence of beneficiaries, like (1) surviving spouse; (2) surviving children; (3) surviving parents; (4) brothers and sisters; and (5) estate.
Do you want your account custodian to name your beneficiary for you? Of course not. But have you experienced a life change – marriage, birth, the death of a loved one? Has it been many years since you opened your account? Check your beneficiary forms.
It never fails to surprise how many people think their beneficiary information is correct when, in fact, their forms are missing, incomplete, or simply list the wrong person. Be like Ron. Get your beneficiary act together.