Does Whom You Name as a Beneficiary Really Matter?
Here at Financial Planning Solutions, LLC, we spend a fair amount of time looking at our client's beneficiary designations.
Why do we do this? Well, namely to help ensure that if one passes away, their wishes are carried out pertaining to their assets.
In its simplest form, a beneficiary designation lets the custodian (i.e. the company holding the deceased person's IRA or 401K) know who is to receive the assets.
Things can get a bit complicated as different types of assets can have different rules (401k's for example have special rules if one is married while IRA's might not) and depending on what state you live in, can determine if there are special rules.
If one is married to a non US citizen, things can get even more complicated.
But, for the sake of this blog, let's keep it somewhat simple.
"Mary", a mother of three adult children, recently reached out to me as she was recently divorced and she wanted to make sure she had a plan going forward to help ensure her financial goals would be met.
Mary had the following assets:
- A house
- A 401k
- A Roth IRA
- A bank account
- A life insurance policy
Seems pretty typical so nothing weird here. However, upon looking a few things over, I realized her ex-husband was listed as Primary (in first position) beneficiary of the 401K, and life insurance. Her IRA did not list a beneficiary and her home was in her name alone. Her bank account was also in her name alone and held over 400k in cash from the divorce.
Now, when one is still divorcing, it is usually not recommended to change any beneficiaries. Always check with your attorney before making these types of changes as one's divorce agreement could dictate certain rules.
Let's say Mary is hit by that bus we always hear about. (Hmm, I wonder how many are actually killed by a bus each year). Anyway, what would happen to her assets?
Since her house was in her name only, it would most likely go through the Probate process and then ultimately, be left to her 3 adult kids. This could take up to a year and involves additional legal costs.
Her 401K and her life insurance would go to her ex-husband, and her Roth IRA which did not have a named beneficiary, would also be tied up in her estate like the house and then pass to her 3 adult kids.
The 400k in her savings could have passed directly to her desired beneficiary (like her 3 kids) if she had attached a Transfer on Death clause to the account. Instead, it would also be subject to the time delays and expense of Probate like her house and Roth IRA.
I'm thinking this would not have been the way she wanted things to go.
She mentioned one daughter was a surgeon (and married to a surgeon), the other daughter was a dancer (and hadn't worked much in 2020), and her son taught middle school.
Her oldest daughter's income was most likely the highest with two surgeons in the house. That being the case, it could make sense to leave the more tax advantaged assets like the Roth IRA and life insurance to that daughter.
So, it isn't always just about who gets what but also, who gets which asset.
I'll end this blog with a story that still sticks with me and drives home the importance of proper estate and beneficiary planning.
Many years ago, "Felicity" and "Hugh" got married. It was a second marriage for each of them and they each had two adult children.
Felicity had inherited a beautiful beach house in Truro down the Cape. It had been in her family for a couple of generations and the family spent every summer there.
The house was in Felicity's name alone. A few years after marrying Hugh, she passed away. Since she was married, did not have a current Will, and the house was in her name alone, it went to Hugh as her spouse.
A very short time after, Hugh passed away and since he owned the beach house, it was left to HIS two kids disinheriting Felicity's two children.
This may seem like an extreme case but the point is, it is important to have your beneficiaries aligned with your wishes and update them when changes occur.
It is always best to have a proper estate plan drafted, review it each year and more often if there are changes, and discuss this with your attorney and Certified Financial Planner® practitioner.
Have more questions or wondering if you should do a "beneficiary review"? Just shoot me an email or give me a call.
Or, if you would like to schedule a complimentary call, click HERE to see my calendar
In good health.
All the best.
Rick Fingerman, CFP®
*Names have been changed
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.