If you have obtained an IRA, 401(k), or life insurance policy, you may think that naming a beneficiary would be a simple trouble-free exercise. Unfortunately, you may also find out the hard way about hidden traps and complications involved in this straightforward step. I would like to examine some of the innocent errors that can haunt your estate long after you’ve exited the scene.
These accounts and policies differ from other instruments in which you might name beneficiaries, such as a will. That’s because they’re primarily designed for your own use while you’re alive, not as something to leave to someone else once you’ve died. Of course, the fact that you can indeed name beneficiaries for these sources of money can be extremely helpful or even necessary for a loved one. The trouble comes when the beneficiary that you named months or years ago is no longer the person you want to receive the benefit.
You might not even know or remember who you named as beneficiary on old, long-forgotten benefit plans. Countless workers leave behind various “orphaned” 401(k) accounts still tied to previous workplaces, never having closed them out. The potential for misnaming your beneficiaries grows even higher under such circumstances.
Don’t make the even greater mistake of assuming that your estate plan beneficiary designations will automatically supersede the beneficiaries’ names on these plans. They do not. While some states can prove frustratingly vague on the subject, Arizona law firmly establishes that 401(k) benefits, IRA benefits, and life insurance benefits count as non-probate inheritances. This means that whoever you’ve named as your beneficiary on those accounts gets the benefits of those accounts, regardless of who you’ve named as your beneficiary in your will or trust.
The problems here are apparent. Even if your will is up to date and your account beneficiary designations are decades old, those ancient designations will hold until/unless you change them. This is good for beneficiaries, who may receive their money faster than they would through probate. But it might mean that someone you no longer love, like, or want to leave money to could receive a windfall against your current wishes. It might even mean that you leave these valuable assets to someone who has already preceded you in death.
How can you prevent such an unhappy outcome? Review the beneficiary designations on your life insurance policies and retirement accounts, including any old accounts you haven’t even thought about in years. You can change the designation, but you’ll have to fill out and submit separate paperwork for each account. Confer with a trusted financial advisor for the best way to name beneficiaries to your life insurance policies and retirement accounts.
Take care not to name your estate as the beneficiary on your retirement or insurance plan. This step could send the account into probate, and it may also have negative tax implications. Avoid naming a minor child as your beneficiary. The minor won’t be able to access the inheritance until they reach the legal age of adulthood, necessitating a court-appointed guardianship in the interim.
As an additional safeguard, name a secondary beneficiary as well as a primary beneficiary whenever possible. If the primary beneficiary passes away before he or she can receive the benefit, the money will go directly to the secondary beneficiary. This ensures that whoever profits from your retirement or life insurance benefit was at least someone you picked out yourself. Remember, you can always change the beneficiaries if your feelings about them change over the life of the plan.
For more thoughts on why you should use a financial adviser to assist you when funding your Living Trust, click HERE.
© 2020 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
