Why Beneficiary Designations Determine Who Gets Retirement and Life Insurance Money

Key Takeaways

• Beneficiary designations on retirement accounts, life insurance, and payable-on-death accounts usually take precedence over wills.

• After major life changes, failing to revise beneficiary forms can produce results you never intended.

• Wills cover assets that do not have beneficiary designations, including real estate, personal belongings, and vehicles.

Television dramas often lean on the familiar scene of a will being read in a wood-paneled office. In murder mysteries, the suspense usually centers on who is included—or excluded—from the document. That dramatic setup works because many people assume a will has the final say over everything they leave behind.

In reality, that is not true for much of what Americans commonly own. Retirement accounts, life insurance, and bank accounts with payable-on-death instructions are generally controlled not by the will, but by the beneficiary form completed when the account was opened and later forgotten. That form typically decides where the money goes after death.

The Document Your Will Cannot Change

As of the latest available data, more than $49.1 trillion was held in U.S. retirement accounts such as IRAs and 401(k)s, along with annuities, according to the Investment Company Institute. None of that money passes through a will.

Instead, those assets are distributed based on the beneficiary information on file with the financial institution. The same principle applies to life insurance policies and to bank or brokerage accounts set up with payable-on-death or transfer-on-death instructions.

Note

Roughly three-quarters of Americans do not have a will, according to a Caring.com survey.

“Beneficiary forms are extremely powerful and trump whatever it might say in the will in most or all circumstances,” said Ari Weisbard, a certified financial planner and attorney at Values Added.

That can actually help families, since loved ones may not have to wait for probate court to release funds for funeral expenses or immediate needs. In most situations, the beneficiary form is the final word. For instance, if a will names a spouse as the beneficiary of an IRA but the account lists the children, the money will go to the children even if the will was recently updated.

Even so, many people never revisit those forms.

“Some people leave retirement accounts in place with old beneficiaries when they leave their job,” Weisbard said. “If they listed their friend or sibling as the beneficiary, that might still govern even if they got married or had kids later.”

Note

Beneficiary forms will direct a large share of the $124 trillion in American wealth expected to change hands by 2048. Heirs are projected to receive $105 trillion, while $18 trillion is expected to go to charity.

How an Outdated Form Can Shape an Estate

Under ERISA, a federal law, the beneficiary form on file determines who inherits an asset. In Egelhoff v. Egelhoff (2001), the Supreme Court ruled that a man’s ex-wife was entitled to his employer retirement accounts even though state law would have removed her claim after the divorce. Federal law overrode state law, the beneficiary designation stood, and the children received nothing.

If you remarry without revising your accounts, your new spouse could face a similar result. Weisbard says blended families create especially sensitive estate-planning questions.

“When you are remarrying, if you have kids you don’t share with your partner, you want to be thoughtful about who is listed as primary beneficiary and in what percentages,” he said. “Often people want to leave at least some assets in a trust for their kids rather than their new spouse.”

It is also important to consider what happens if your primary beneficiary dies before you do. Without a contingent beneficiary, the account usually becomes part of your estate, which is one of the few situations in which your will matters again. In that case, the money is handled through probate court instead of being transferred directly, which is exactly what beneficiary forms are meant to avoid.

Warning

Courts generally cannot correct an outdated beneficiary form after death. If a named beneficiary receives a lump-sum payment before the mistake is discovered, getting that money back through legal action can be difficult and costly.

What Should Not Be Covered in Your Will

Because beneficiary forms already handle retirement accounts, life insurance, and payable-on-death accounts, your will should focus on what remains: real estate that is not jointly owned, personal items such as jewelry and vehicles, and any other property without a beneficiary designation.

It is important to coordinate your will with those beneficiary forms.

“If you want to leave some money to a friend in your will and then also leave them a portion of your account via a beneficiary form, they may get both bequests,” Weisbard said. “Make sure your will is very specific if it’s meant to summarize what you’re doing in your beneficiary forms, rather than supplement those forms with additional bequests.”

Along with retirement accounts, estate-planning specialists say there are three major items that should be left out of your will:

What To Do Next

Set aside 10 minutes to review every account that has a beneficiary designation: your 401(k), IRA, Roth IRA, life insurance policies, annuities, and any bank or brokerage accounts set to transfer at death. Make sure the names listed are the people you would want to inherit those funds now.

Also remember to update those forms after major life changes such as marriage, divorce, remarriage, the birth of a child, or the death of a named beneficiary.

Take care of it now and leave the drama to television.

Read the original article on Investopedia