Not paying attention to how life events can impact your financial affairs can be devastating. Just ask Erin.
Updating beneficiaries after a marriage, divorce or death can be inconvenient and in some cases painful, but it is also oh so important! Any of these life events should trigger the “to do” of reviewing your financial situation as a whole.
We’d like to share a bit of Erin’s story and how a slight oversight can have great effects should something unexpected happen. Hopefully this will motivate you to make any changes you’ve been putting off and/or check with your loved ones to make sure they have recently reviewed their own beneficiary designations.
Inheritance to the Wrong People
Steve, Erin’s deceased husband, had overlooked changing the beneficiary on his employer 401(k) plan after they got married. He had updated the rest of his financial assets and policies, but missed this one. His beneficiary never got changed from his nieces – the three that were alive when he started working for his company in the mid-90’s. He had worked there for 15 years before he unexpectedly passed away in August of 2013.
When Erin went to transfer the account into her own name, she was surprised to find that she wasn’t the beneficiary listed on the plan. Since he and his employer had been contributing to this account for the past decade and a half, it had a significant balance – enough to make a difference in the lives of his wife and two young daughters that were left behind.
If you’re left money you can decide to accept it or disclaim it – meaning that you reject the gift. This is done commonly when mistakes (or oversights) are made or if the beneficiary doesn’t feel that they need the resources. Disclaiming a gift relieves your personal tax burden and passes the burden onto the person that accepts the money. If the money is disclaimed by the beneficiaries is it allocated into the decedent’s estate for management.
Unfortunately his designated beneficiaries didn’t agree with Erin – that Steve would have left his 401(k) plan to his wife and kids and they decided to keep the money for themselves.
Erin begged and pleaded with them to change their mind. She reminded them of Steve’s passion for education and the fact that he would have wanted his hard earned money to be used to ensure his children could receive a quality education for their future. The request to put even a portion of the money into a 529 for their children was denied.
Since his three nieces were listed, she had little recourse and had to accept the situation as is. Unfortunately people don’t always react the way you thought they would when it comes to money after a death. If you believe people will make the same decisions as you would when you are gone – think again!
Review Beneficiaries Regularly
For most people, there is no need to review beneficiaries annually. As mentioned above any major life event should trigger a review however. Especially marriage, birth of children (or grandchildren), divorce and death should warrant a review and potentially changes.
Old employer retirement plans are often overlooked. So are current 401(k)’s, POD’s (payable on deaths) on bank accounts and TOD’s (transfer on deaths) on non-qualified brokerage accounts. You can also add property beneficiary designations to real estate in many states these days, which you file with your county recorder.
One consideration for beneficiary planning is to have at least one cash account listed as a POD to the person that would help manage your funeral plans. This will ensure that funds are available immediately for initial expenses without putting an undue burden on your trusted person.
We’ll expand on estate planning more in future posts, but for now please take a few minutes to compile a spreadsheet of your current assets/accounts and make sure you document who the beneficiary is on each of them. If you are not 100% sure, request a new beneficiary form and complete it immediately. If you don’t have a beneficiary listed, consider adding someone. This will avoid the probate process.
Keeping a spreadsheet of your accounts, the contact information of the account, and the beneficiary will ensure that you have an easy reference document. Once this document is created you can easily review your beneficiaries on an annual basis in 30 minutes or less. Think of this time as an investment in your family’s future.
Due note that the beneficiary designation on an account will ALWAYS trump what is listed in your will. This is often misunderstood!
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