Checking the Beneficiary Box, Part I
by Richard
What’s the least favorite topic wealth management clients want to discuss?
Their eventual, inevitable demise.
Predictably…many put their head in the sand and ignore this eventuality.
Which explains the huge percentage of families who have not done the most rudimentary of wills and life insurance protection.
But even for these laggards, your employer’s H.R. department will prod you to make some end of life decisions. Whether you like it or not.
I refer to the beneficiary designation you must check off when you participate in your workplace 401k and free life insurance program. Or your regular or Roth IRA.
This is estate planning on the cheap.
It only takes a quick stroke of the pen, but the consequences can be both long lasting and monumental in scope and outcome.
Here are some salient features you need to understand and utilize.
1. In most states, if you do not name your spouse as the designated beneficiary of your account, you must have the spouse’s signature allowing another designee.
This is to protect a marital interest from being carelessly or recklessly extinguished. It might be appropriate and acceptable if children from a prior marriage are named as primary beneficiaries…but this is something that must be explained and bargained for upfront
2. You will be asked to name both a primary beneficiary as well as a secondary.
Typically, if the spouse is the primary, the contingent beneficiaries would most likely be your children, the sum to be divided equally. In some cases, you can even designate your children “per stirpes” which means that their share would pass to their own heirs if they should predecease their parents.
I warned you, this discussion on death probabilities and outcomes can quickly turn very creepy.
3. Pitfalls. There are many. Here are the most common.
a. You may have named your parents as beneficiaries when you were single, without bothering to amend the designation to your spouse after marriage.
Payout goes to the named beneficiary, even if that is not who you intended at the time. The law recognizes the written selection, not the life changing events in the interim.
b. You may have named one child as beneficiary, to receive the full 100%, but later have other children who you would have wanted to get equal shares.
c. This is the biggie.
Naming your current spouse as beneficiary…not taking into account that you you may have a different spouse when the claim is filed. You would not believe how many ex spouses collect these bonus payments years after their marriage terminated.
The solution is simple enough.
You must do an annual review and update of your designations. Even if your will is current and up to date, the beneficiary designation will override any such apportionment of your holdings.
In part II, we will explore options that could stretch out the payout to your beneficiary by many, many decades. An extreme version of controlling from the grave.
