Reviewing Your Beneficiary Designations – Retirement Plans and Life Insurance

I tell my clients to review their Wills, Trust and Powers of Attorney every three to five years to be sure that they still meet their intent. Often, all remains the same and no changes are needed. Other times, those named as fiduciaries have died or have had major life changes that no longer make them good candidates to serve as executor, trustee or attorney in fact. Despite the diligence in this review, many people neglect to review their beneficiary designations on some of the most important documents; the beneficiary designation forms on their 401K, IRA, life insurance and other contract policies. Unlike other assets, where beneficiaries are determined by your will, the beneficiaries under these types of policies are determined and superseded by the beneficiary designation form on the IRA, 401K or Life Insurance policy and in the absence of any such designation, by the contract itself. Your Last Will and Testament generally has no effect on how these assets pass at your death.

Independent of your intentions, such as seeing the assets distributed to your spouse and children, insurance companies and custodians of retirement accounts must follow certain rules based on the beneficiary forms or the retirement plan’s governing document – even if that means the money may legally go to an ex-spouse.

If you do not specify what percentage each beneficiary should receive, many retirement account custodians will evenly distribute your assets between all the listed primary beneficiaries — even if your intent was for the first of two beneficiaries to receive 75% and the second to receive 25%.

With each policy, diligently designate your primary and contingent beneficiaries. Primary beneficiaries are the first in line to receive your retirement account assets or life insurance policy proceeds when you pass away.  If there are no living primary beneficiaries, the contingent beneficiaries are next in line.

Many employer sponsored retirement plans, such as 401K and 403B Plans are governed by ERISA so typically a current spouse is protected but you will want to check your current plan.

Unlike with ERISA retirement plans that are governed by federal law, Individual Retirement Plans (IRAs) are governed by state law. The IRA beneficiary designations supersedes the will.  If an ex-spouse is listed as the sole beneficiary, the ex-spouse gets it all. Any attempt to recover the money would have to be in a civil “breach of contract” lawsuit if the ex-spouse, in accepting the money, is in violation of a marital agreement. Life insurance companies follow the contract beneficiary form therefore if an ex-spouse is listed as the sole beneficiary, the ex-spouse gets it all. Again, litigation will be required to try to reverse this, with no guarantees.

Be sure to review and update your beneficiary designations regularly so that only those you intend to benefit actually do! If you need assistance, the attorneys at Law Firm Carolinas are happy to assist in this review.

Estate Planning & Admin