Key Points
Years ago, I knew a woman who’d recently gone through a contentious divorce. There was no “conscious uncoupling.” This couple went scorched-earth during their divorce, doing everything they could to hurt each other.
Months later, with the ink on the divorce papers barely dry, the ex-husband died. And because he’d never changed the beneficiary on his life insurance, his ex-wife became a relatively wealthy woman. It was clear that the ex-husband could have used professional estate planning before his passing.
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Even if you have a will in place and have designated who you want your money and possessions to go to when you’re gone, failure to update some of your most important accounts could derail your entire plan.
Designate (and check) beneficiaries
When you open a retirement account like a 401(k), IRA, or pension plan, you’re given the opportunity to name a beneficiary — a person (or people) you want the money to go to when you die. You can also name a contingent beneficiary, in case the original beneficiary dies before you.
However, naming beneficiaries shouldn’t be a one-time “set it and forget it” task. Even if you have a will in place, the beneficiaries named in your most important financial papers are almost certain to receive the proceeds following your death.
Your choices are likely to override your will
If you have an IRA, annuity, life insurance policy, bank account, brokerage account, or a trust, it’s probable that the beneficiary or beneficiaries you’ve named on those documents will receive the proceeds of the account upon your death, even if you’ve named another beneficiary in your will.
Note: Most 401(k)s and pension plans require a spouse to be named as the primary beneficiary unless the spouse gives written permission that someone else can be named. The same isn’t true of IRAs.
What should you do?
To prevent confusion, consider implementing these practices:
- At least once a year, check the paperwork for each account to ensure the correct beneficiaries are named and, if needed, make changes. If you’re not sure where to find the beneficiary form, ask the account administrator or a bank representative.
- Whether you’re opening a new IRA or brokerage account, take a moment to learn how to switch beneficiaries, should the need ever arise. Rules can vary by account type and specific account administration rules.
- If a beneficiary dies before you and you haven’t named a contingent beneficiary, immediately name a new beneficiary. If you haven’t named a beneficiary on a financial account, the account becomes part of your estate when you die and will have to go through the probate process. Probate requires court-supervised distribution of assets, which can cause significant delays.
The time spent ensuring your beneficiaries are in order could save your loved ones a great deal of heartache and frustration down the road.
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