When Should I Change My Beneficiary?

Posted By WealthPLAN || 15-Dec-2014

As estate planning attorneys, we know that beneficiary designations play a key role in the estate planning process. A beneficiary is a person or a legal entity who is entitled to receive proceeds from a trust, retirement account, life insurance policy, transfer on death account, or an estate. A beneficiary can be one or more individuals or organizations, such as a church or charity.

Beneficiary designations generally supersede the instructions in wills; this is why it is important to file and keep your beneficiary designations up-to-date. By personally reviewing your beneficiary designations on life insurance policies, retirement accounts, and other financial accounts, you can have peace of mind knowing that your assets will not wind up in the wrong hands should something unexpected happen to you.

If you haven't designated your beneficiaries for your bank, brokerage, retirement, life insurance, company benefit plan, or 529 college accounts, you should get started. If your forms are out of date, you will want to change them as soon as possible. Unfortunately, a lot of folks fail to take these simple steps and the consequences for procrastinating can be devastating.

Here is a real life example, in Egelhoff v. Egelhoff, 532 US 141 (2001), Dad was married when he designated his wife as his beneficiary of a life insurance policy and pension plan provided by his employer, both of which were governed by the Employee Retirement Income Security Act of 1974 (ERISA). Dad divorces his wife and did not immediately remove her as a beneficiary. Weeks after the divorce was finalized, he was killed in a car accident.

Dad's children from a previous marriage filed a suit against his ex-wife for the benefits from their deceased father. The Supreme Court ruled that the beneficiary designations trumped state law that would have disinherited his ex. In the end, the ex-wife got the money and his children got the bills for an unsuccessful legal battle.

When to Review Your Beneficiaries

It is important that you update your beneficiary designations when:

  • You experience a major life event such as a divorce, a marriage, a birth, or death in the family.
  • You update your estate planning documents.
  • You receive a beneficiary verification notice.
  • You roll over your 401(k) or IRA.

If it is one thing we know as estate planning attorneys, life changes and few things remain the same. Relationships change, marriages change, and careers change. A client may have new beneficiaries, or they may have filed for divorce or gotten remarried. They may have had a falling out with a sibling or an adult child, and they may not even be speaking.

Beneficiary designations are extremely important because they control a large portion of our clients' wealth. It is a common mistake to designate a beneficiary, then to file the papers away where they are long-forgotten in an old file cabinet.

Often, an individual made these designations early in life and forgot to update them. If they're lucky, a state statute may save the day, but other times it may not. Make sure your beneficiary designation are up-to-date.

Contact a San Jose estate planning lawyer from WealthPLAN to schedule a consultation.

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