When it comes to our investment accounts, one of the most overlooked aspects is the beneficiary form. In some cases, people don’t add a beneficiary at all, and in other cases, the information is outdated and the wrong people are listed on the account. Nobody likes to think about death, but the beneficiary information is very important and shouldn’t be taken lightly.
Beneficiary designations are a way to pass on assets to another upon death through a contract. I wrote about transferring assets upon death by operation of law or contract last year, and it is a good primer to go through if you aren’t familiar with the subject. The most important thing to remember is that transferring assets in this way can have tax saving implications, and will generally be done separate of the probate process.
Two Real Stories
If there is anything to bring awareness to this subject, it is seeing firsthand what not having your beneficiaries updated can mean. Part of my job involves working with the survivors of a deceased plan participant and to help them sort out what to do with their retirement assets. In the past few months, there have been a few occasions that had unfortunate results simply because of the participant neglecting their beneficiaries.
The Untimely Death
In our generation, we pay little attention to the prospect of death. We generally expect to live another 40 years or more. Even so, the unexpected can happen, so that isn’t a reason to delay.
For example, not too long ago there was a participant in their mid-20s who unexpectedly passed away. Even at such a young age, they managed to save up some retirement assets. Unfortunately, being so young, they probably thought that there was no need to worry about things like beneficiaries. This is not a wise decision when you have a spouse and kids.
While the money is not lost, it does create some added problems. If the spouse had been set up as the primary beneficiary, they could have easily transferred the assets into an IRA in their name, and avoid taxes on a distribution and continue to defer taxes. Without a beneficiary, they are likely stuck with the result of the assets going to the estate, and then through the probate process. This may eliminate any special tax treatment, may take a long time to settle the estate, and could result in more attorney fees. This is unfortunate when you consider a beneficiary could be named in about 30 seconds by putting a name on a form or entering it online.
Another recent example that I regularly see is when beneficiaries are not updated when changes occur. The most unfortunate of this occurred when an old participant who was already retired had their sole beneficiary as their spouse. Normally, this is perfectly appropriate, but you have to remember to make changes if your spouse predeceases you.
In this situation, that is exactly what happened. Their spouse had passed on, and there were no contingent beneficiaries on file. That means once their spouse dies, there are no beneficiaries listed. They should have at least updated their beneficiary upon the death. Or, they could have named contingent beneficiaries so that in this situation, there would have still been someone in line to receive the proceeds of the account.
Instead, this participant died shortly after their spouse, and the accounts were left without any living beneficiaries. The siblings were obviously quite upset to realize that this was the case and that these funds were likely going to simply go into the estate, which they were concerned may put them into a situation that could trigger estate taxes. As a result, this could lead to an extremely costly mistake.
Don’t Make the Same Mistakes
As unpleasant as thinking about what happens to your stuff when die might be, it isn’t something to be avoided. Filing out a beneficiary form usually takes a matter of minutes, and with technology, can often be done immediately online. Even if you already have established your beneficiaries, you should double check to make sure the company still has a record of it, and that the correct people are listed.
Not only will you be able to possibly save time and money by going through beneficiaries, you can also make the difficult time surrounding a death just a little bit easier. Your survivors will have less to worry about, and it will make the difficult situation just that much easier.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.