Beneficiary designations trump wills
One simple form — one simple line — can make all your client’s best laid plans go awry. It doesn’t matter what his spouse says. It doesn’t matter what his will says. It doesn’t matter what his trustee says.
It doesn’t matter because the beneficiary designation on his life insurance policy, IRA or 401k account trumps them all, says the New York University Law Review in its published report, “Accidental Inheritance: Retirement Accounts and the Hidden Law of Succession.” http://tinyurl.com/lwcd49f
If your client is in danger of having his wishes disregarded, an estate planning attorney can help him make the necessary changes to get his affairs in order.
Follow the money
Americans hold more than $9 trillion in employee-sponsored defined-benefit plans and IRAs, the NYU Law Review says, making these retirement accounts the individual’s biggest non-probate assets. But unlike other non-probate assets such as life insurance policies and revocable trusts, retirement account holders don’t generally set them up for purposes other than identifying future beneficiaries.
Setting up a 401k retirement account generally happens with your client’s first job, says the NYU Law Review, with the beneficiary designation form as a matter of course. Your client may not look at these forms for decades, and some will undoubtedly believe that setting up a will or trust will take care of these assets. Others might believe that prenuptial agreements or divorce decrees can hold sway.
But it doesn’t matter. The beneficiary designations take precedence, says the Financial Planning Association in its “10 Essential Documents for Retirement” — even if the will is more accurate and up to date. http://tinyurl.com/kmochpz
The result, says the NYU Law Review, can be a form of accidental inheritance. Your client’s retirement account, probably the most significant asset he has, could be doled out in ways your client didn’t intend.
Some states, by statue or case law, hold that only a beneficiary designation form is to be used to distribute these assets — even if a will, trust or other document precisely identifies the account. Other states, says the NYU Law Review, have vague standards that will cost your client plenty to resolve through litigation.
Employer-sponsored plans, such as 401k accounts, are protected by the Employee Retirement Income Security Act. It prohibits account holders from changing the beneficiary designation in any way other than by using a change of beneficiary form. In theory, this makes it easier for the designated beneficiary to more quickly receive the assets. In actuality, however, it makes it easy for the assets to pass in accordance to a preference executed decades earlier, a preference long out of date because of changed life circumstances your client couldn’t anticipate.
The inadequacy of the current system, warns the NYU Law Review, is a disaster waiting to happen, because retirement accounts and the family home account for the principal assets of most working and retired Americans. The issue of beneficiary designations has resulted in considerable litigation, says NYU, but it’s only a taste of what’s to come as the Baby Boom generation continues its march to retirement.
What to do
Have your client review the beneficiary designations on all of his accounts before retiring to ensure that they reflect your client’s wishes, the Financial Planning Association says. If they don’t, contact the bank or plan administrator to request change of beneficiary forms.
We would add, however, that your client should have an experienced estate planning attorney help perform these reviews, as well as a full audit of any existing planning documents.
Bankrate also has suggestions. One is for your client not to name his estate as the beneficiary because in that case it will have to go through probate. Don’t name minor children as beneficiaries because by law children can’t control the assets, so the court would have to name a guardian. http://tinyurl.com/q39cun3
A final suggestion is for clients to name contingent beneficiaries. In this case, if the beneficiary dies before your client, the assets still can be distributed as your client wishes. Make sure to keep everything up to date, and copy the documents — in triplicate or more.
We hope this information was useful to you, your clients and their families. To get more information regarding this or any related topic, please visit our website www.TEPLG.com or call us at 630-871-8778.