June 1, 2019
When you signed up for your first retirement plan, you were likely presented with a “beneficiary designation” form. You examined your life circumstances at that moment in time, and determined who was the most suitable beneficiary. Perhaps you listed your spouse, child, sibling, or friend. Maybe you even listed a “contingent beneficiary” (someone who would receive the benefit if the primary beneficiary died). You filled out additional “beneficiary designation” forms when you signed up for life insurance policies and when you started a new job with retirement benefits or a health savings account.
But did you update those forms when your life circumstances changed? Perhaps you got married or divorced, a loved one died, you had or adopted (more?) children or grandchildren, or a trusted friend or loved one fell out of your life by choice or circumstance. If you did not update those forms, your loved ones may be in for an unwelcome surprise. So, let this serve as a reminder to make those updates now.
If you have failed to review and update your beneficiary designations, you are not alone. In one recent Ohio case, a deceased husband’s and father’s retirement benefits were paid over to his parents because he failed to update the form after marriage and fatherhood. Though you might anticipate that the parents would use the funds to benefit their son’s widow and children, there are several legal hurdles: (1) the parents will be personally subject to tax rules and penalties; (2) the transfer into or out of the parents’ names may affect the parents’ eligibility for disability or nursing home benefits; and (3) the parents are not legally obligated to use the funds for the widow and children. So, let’s not rely on the listed beneficiaries to graciously fix your omission.
State law has attempted to “cure” some of the most common omissions. For example, Ohio has a rule that a divorce or dissolution will automatically revoke a designation of the ex-spouse as a beneficiary, but there are several exceptions to when and how this rule is applied. Likewise, there is a law that will add an “after-born” child to your will, but that law does not apply to life insurance policies and retirement accounts. So, let’s not rely on the “law” to fix your omission.
Your beneficiary designations should complement (work together with) your will, trust, and other estate planning documents, and should be reviewed and updated regularly. Ask your lawyer or financial advisor whether and how to update your beneficiary designations for all of your financial assets.