Updating Beneficiary Designations
Volume 2011 / Issue 5
August 12, 2011
With all of the changes taking place in clients' lives—from marriage to divorce, births to deaths, financial windfalls to financial setbacks—it shouldn't be surprising that financial details sometimes get overlooked. One such detail that can have a potentially devastating long-term effect is failing to keep beneficiary designations up-to-date.
A recent U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and results can sometimes be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named Liv as his beneficiary way back in 1974 shortly after they married. The couple divorced 20 years later in 1994. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.
When William died in 2011, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way that plan required, Liv’s waiver was not. Thus, the plan rightfully paid the $400,000 to Liv.
The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and a lot less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important take away points.
The first is that if you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather that depending on an indirect method such as a will or divorce decree. The second point is that it’s important to keep your beneficiary designations up-to-date. Whether it is because of divorce or some other life changing event, beneficiary designations made years ago can easily become outdated.
One final note regarding beneficiary designations, while you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.