BENEFICIARY DESIGNATIONS- SIMPLE MISTAKES THAT CAUSE BIG PROBLEMS
When you open an IRA, other retirement plans or annuities, the custodian always asks you to indicate in writing who should receive the balance in the account at your death. This is called a “beneficiary designation”. What could be simpler? All you have to do is list the primary beneficiary and name a “contingent” beneficiary who will receive the proceeds if the primary beneficiary is not living at the time of your death. Unfortunately, mistakes in filling out these forms and the failure to update them can result in costly mistakes that can pit heirs against one another and destroy the family harmony you sought to build throughout your life. This letter discusses six of the most common mistakes people make regarding beneficiary designations and encourages readers to consult with their estate planning attorney to ensure that the designations are correctly written so that assets passing through these policies or plans follow the framework of your overall estate plan.
Mistake #1: Failure to name a beneficiary who is alive and capable of taking the assets following your death. Most people assume that if a beneficiary is not named or the sole named beneficiary is deceased, then the assets will pass in accordance with the terms of their Will. Unless you read the fine print of the policy or plan documents, you can’t be sure this is the case. For example, I had a recent case where an insurance company, following the default terms of the insurance agreement, transferred the assets to the policy owner’s living children following his death. This was definitely not the owner’s intent as he clearly disinherited his children in his Will.
Mistake #2: Failure to remove your ex-spouse as a designated beneficiary following a divorce. While most states, including Idaho, have statutes that provide that an ex-spouse is deemed removed from a Will, equivalent statutory treatment is not give to beneficiary designations or ex-spouses named as beneficiaries of a trust. Many is the unhappy widow who finds out that her expected means of support has been given to the hated ex-wife!
Mistake #3: Listing multiple beneficiaries as either primary or contingent beneficiaries without stating what happens if one dies. Again the problem is that, unless you read the fine print of the policy or plan document, you cannot be sure that the property will pass as you would wish. For example, you may think that if one named beneficiary dies, then his share of the property will go to his or her children (as it commonly does in a Will). The policy or plan document may instead provide that, in the event that the beneficiary designation is silent, the deceased beneficiary’s share goes to the remaining named beneficiaries.
Mistake #4: Listing multiple beneficiaries to an IRA without stating that each beneficiary takes a separate share. Unless they each take a separate share, the payout may be over the life span of the oldest beneficiary rather than each beneficiary according to his or her expected life span.
Mistake #5: Establishing a trust for a beneficiary during your life or at death and then failing to designate the trust as the beneficiary of your policy or plan assets. You may not want assets to go outright to an individual due to his or her immaturity, spendthrift ways, potential exposure to creditors or because he or she is receiving government benefits and outright payment would result in a loss of eligibility for those benefits. Also, the terms of the trust will determine whether a minimum required distribution must be distributed to a beneficiary or accumulated for him or her. Trust rules regarding retirement plans are very complex and a mistake can result in unintended consequences.
Mistake #6: Failure to check with the insurance or plan custodian to make sure that they have the correct beneficiary designations. Insurance companies and custodians may lose your records. You should also keep a copy of your beneficiary designations with your estate documents so that your personal representative and/or trustee is able to monitor the payments by the insurance company or plan custodians.
As attorneys, it is usually certain heirs (or omitted heirs) that come to us saying, ‘I should have gotten the money, not X or Y—can this be fixed?’ You probably do not want litigation to follow your death or family members to argue over what you did or did not intend. The solution to preventing these problems is to make sure that the beneficiary designations are coordinated with your estate plan, correctly written, updated and verified regularly.
Mathieu, Ranum & Allaire, PLLC is a boutique law firm with offices in Boise and Sun Valley, Idaho focusing exclusively in the areas of estate and trust planning, probate and trust administration, asset protection, business law and charitable organization laws. We represent individuals, families, trustees, heirs and beneficiaries, entrepreneurs and closely held businesses, tax-exempt organizations, and family offices, as well as professionals and business owners potentially exposed to future creditor claims.
The foregoing is NOT legal advice. We have prepared these materials to inform and educate. They are not, and should not be considered, legal opinions or advice to anyone, nor do they create an attorney client relationship by your reading them. These materials may not reflect the most current legal developments in the applicable area of law. Furthermore, this information should in no way be taken as an indication of future results.
In order to comply with the requirements of IRS Circular 230, we must inform you that any tax advise contained herein, including any attachments hereto, are not intended or written so as to be used and indeed, may not be used, by any person, including the recipient(s) and other persons who receive or read this discussion and/or any attachment hereto, for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Code or Internal Revenue Service or (ii) promoting, marketing or recommending to any party any tax-related matter or idea contained herein.
© Mathieu, Ranum & Allaire, PLLC. 2014