I thought of something helpful for people “quarantining” to do while spending time at home: review the beneficiary designations on their accounts! Admittedly updating beneficiaries on life insurance and financial accounts isn’t the most fun part of financial planning, but it could be one of the most important things you do!
If you are thinking “yeah, I have a will already”, be forewarned that a beneficiary designation supersedes your will. So, if you name your children in your will but accidentally keep your ex-spouse on your retirement accounts…guess who gets that money? (Hint: it’s not the kids).
Believe me: I’ve seen and read about disaster situations. And it’s amazing to think that someone can have a large IRA – possibly the biggest asset they own – go to someone they didn’t intend it to. Don’t be that person!
Beneficiary designations can also help keep assets out of probate, which is often lengthy, expensive, and public information for the world to see!
When should you update beneficiaries? Here are some ideas:
- Annually. Do it every year, just like doing your taxes. If you make it part of your routine, you should be on top of it.
- Family Events. Marriage, divorce, the birth of a child/grandchild, or the unfortunate loss of a spouse or loved one should trigger a review.
- Money in Motion. If you’ve opened new accounts or rolled over a retirement account, your beneficiaries won’t automatically update. Make sure you designate one then…the firm, or the person assisting you, may not be thinking about that.
- Change in the Law. The Secure Act of 2019 is a perfect example, as it eliminated the “stretch IRA” for non-spouses. This, in turn, creates some need to change beneficiaries to ensure you pass things to your heirs more efficiently.
If none of the above are reason enough to make sure your beneficiaries are correct – know that post-death fixes are expensive! And most times..not fixable! Often your heirs would have to file a “private letter ruling” with the IRS ($10k+) as well as attorney fees. All for an uncertain outcome.
Want an actionable tip that will save your family grief? Keep copies of the records where you designate your beneficiary.
Think your bank or brokerage firm has your beneficiaries right? Don’t count on it. With companies merging and advisors changing firms constantly, it’s easy for the paperwork to get lost in the shuffle. Request proof, and keep it on file.
If you think about it, do you think these large institutions are prioritizing your beneficiary forms or updating them accordingly? I don’t think it’s a big priority to them (no offense financial companies!). Control what you can – keep good records.
One other tip: if you are going to include a charity as beneficiary, it’s best to split an IRA into separate accounts and designate different beneficiaries on each one. In other words, if you intend to leave your daughter 90% of your IRA and the Humane Society the other 10%…split the accounts into two with a 90/10 split of assets and designate beneficiaries accordingly. That way the distribution rules do not get complicated for the daughter.
My best advice when a non-spouse, like children, inherits an IRA: don’t touch anything! Don’t transfer the account nor take distributions from the account, as the unwanted consequences may have no remedy and cannot be reversed. Be aware of the options and then act.
I encourage my clients to have a yellow sticky note on top of their estate planning documents, with the following words in all caps: TOUCH NOTHING – CALL BRANDON OPRE FIRST 754-703-6773.
Make sure you have your records in order. Now would be a great time to tackle this stuff! If you need help, reach out to your accountant, financial advisor, or estate planning attorney.