Last month a grandson of one of our clients called me with the sad news that his grandfather had passed away. I knew his health had been fading over the past year, so while I was sorry to hear it, I wasn’t entirely surprised. It was a difficult conversation, as those things are, and the only comfort to come out of it was the fact that the elderly man had prepared for this day through proper planning. By keeping all of his documents current and in good order, he was able to ensure that his assets would pass to his loved-ones according to his wishes.
Upon death a person’s assets will transfer to a new owner, but the fashion in which they do so depends on the type of account in which they’re held. Some accounts may transfer by title or ownership — accounts that are held in both a husband and wife’s name, for example. Others may transfer according to the will or trust documents that have been established. There may also be accounts that transfer according to beneficiary designation, which is also known as a ‘will substitute’ and is often used in retirement plans, life insurance contracts, and annuities. Accounts that pass by beneficiary designation do so outside of one’s estate planning documents (such as a will or trust), and so it’s vital that they be reviewed carefully to ensure that they’re in line with one’s current distribution goals.
Over the years I have encountered several instances where having outdated beneficiary designations have either severely impacted a family’s financial well being or just didn’t go the way that they were originally planned. One particular example involved a husband and wife (we’ll call them Frank and Mary) who had been married for over twenty years. Mary passed away suddenly due to a heart attack, and as Frank gathered the asset transfer documents, he discovered that he was not the ultimate beneficiary of her retirement plan. You can imagine how he felt when he learned he would not receive any of the nearly one million dollars that Mary had accumulated.
Prior to her marriage, Mary had designated her mother as the primary beneficiary of her then-modest retirement account. Her uncle and brother were listed as the contingent beneficiaries in the event that her mother was no longer alive to receive the inheritance. Several years after Mary and Frank were married, her mother passed away, and two years after that, she lost her uncle in an auto accident. As time went by Mary and her brother had a falling out and severed their relationship. But even though Mary had experienced several significant changes in her life, she never thought to update her beneficiary designations. As a result of that inaction, she unwittingly left her husband in a difficult financial situation, and her brother received everything.
Frank was beside himself, and took the matter to court. Unfortunately, there was no way to prove that it was Mary’s intention to make her husband the beneficiary, and so the court had no choice but to rule in favor of her estranged brother.
This is an extreme example, of course, but it underscores the importance of keeping your documents current and in good order. As we work with new clients, we sometimes discover that their beneficiary designations are outdated, or that there are no contingent beneficiaries listed on their accounts. Other times we find that there are minor beneficiaries listed, or that the current beneficiary is no longer the person they want to leave their assets. For this reason, we recommend that you review your beneficiary designations every year or two. If you don’t remember the last time you updated your beneficiaries, or if there have been any significant changes in your life, or if you’re simply unsure that your beneficiary designations are in-line with your current distribution goals, now would be a good time to review it with your advisor.