Do you have any of the following?
Individual Retirement Accounts (IRAs)
Life insurance policies
Stocks, bonds, other financial instruments
Retirement plans through your employment (e.g. 401k, defined benefit plan, 403(b), military retirement, federal retirement, etc.)
Do you know who the beneficiaries of these assets are in the event you die? Often, the beneficiaries of these assets are governed by beneficiary designation forms. If you are completing your estate plan or have been recently divorced, you need to review your beneficiary designations.
Beneficiary Designations and Estate Planning
Even though you have a will or a trust, it may not govern who will receive certain assets when you die. IRAs, life insurance policies, stocks, and certain retirement plans allow the owner to designate the beneficiary through a beneficiary designation form. This means that the asset may not be distributed by your will or trust. If you would like an asset to be distributed via your trust, your trust would need to be the named beneficiary of the asset. Reviewing your beneficiary designations is one of the most important steps in completing your estate plan.
Beneficiary Designations and Divorce
Clients often overlook the importance of reviewing their beneficiary designations after they have been divorced. This can be a costly mistake. In a recent United States Supreme Court case, the Court held that plan administrator performed its duty by paying retirement benefits to an ex-spouse, even though the ex-spouse waived the retirement benefits in the divorce decree. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 1295 S.Ct 865 (2009). Here’s what happened:
William Kennedy was a participant in his company’s retirement plan. While married, William named his wife, Liv Kennedy, as a beneficiary of his retirement plan. William and Liv later divorced. In the divorce decree, Liv disclaimed her interest in William’s retirement plan. William neglected to change his beneficiary designation with his company. William died. Even though the divorce decree stated that Liv disclaimed her interest, Liv still received William’s retirement funds, and William’s estate received nothing.
What Does this Mean For You?
Whether you are completing or reviewing your estate planning, or whether you have recently been through a divorce, it is important that you review your beneficiary designations forms to ensure that the desired beneficiaries are named. You may also benefit from seeking competent professional advice regarding the tax and legal ramifications of naming a beneficiary.
Disclaimer: The above information is a high-level overview of the need to review beneficiary designations. In many contexts, it is important to seek competent professional advice regarding: (1) who the named beneficiary can or should be (e.g. federal law requires that a spouse of a married individual be a named beneficiary of a 401k plan, unless a waiver is obtained); (2) the tax and legal ramifications of naming the beneficiary (e.g. in the context of an IRA, it may be advantageous to have the spouse named as a beneficiary instead of a trust), and (3) to review the process of appropriately changing the beneficiary designation forms.
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