The Importance of Naming Beneficiaries

Certain types of assets, such as life insurance, IRAs, 401ks and annuities, allow the owner to name a beneficiary.  The asset will pass directly to the named beneficiary, outside of probate.

When creating or updating an estate plan, making sure the beneficiaries are correctly named is a very important aspect that is often overlooked.

In addition to naming a primary beneficiary, the account holder is able to name a contingent or secondary beneficiary in the event the primary beneficiary predeceases.  If a contingent beneficiary is not named, the default beneficiary under the insurance, retirement plan or annuity will often be the estate. That means that asset, which would not require probate if a beneficiary was named, has become a probate asset. 

If the asset was purchased years ago, the beneficiary designations set up at that time may no longer be correct.  There have been many cases where someone names a spouse as beneficiary of life insurance or an IRA, divorces that spouse and remarries, but never changes the beneficiary from the former spouse to the current spouse.  The failure to update the beneficiary meant the former spouse received those funds.

There have been cases where the company that serves as custodian of a retirement plan changed to a new custodian, or maybe had several changes in custodian, and the records showing who was named as beneficiary were lost.  Sometimes it hasn’t even involved a change in custodian.  The account may have been held at one financial institution for twenty years, but when that institution updated its systems, the records showing the beneficiary for that particular account did not get updated. Those occurrences show that checking the beneficiaries every so often, even if there isn’t a need to change, is important.

It’s also important to make sure that the way the beneficiaries are named coincides with the account owner’s Will or Trust.  For example, if a widowed mother with two children has a Will that leaves her estate equally between her two children, but names only one child as beneficiary of her IRA, which is her sole asset, the other child is unintentionally disinherited. 

It is possible to undo the intention of an estate plan without realizing it by changing or failing to change a beneficiary.  Check your beneficiary designations periodically to make sure your wishes are carried out.

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