If you have an employer sponsored retirement plan, a life insurance policy, an annuity, or other retirement accounts, you probably specified a beneficiary to inherit the proceeds upon your death. Beneficiaries can also be named on brokerage accounts, certificates of deposit, mutual fund accounts, and bank accounts. These accounts become known as payable on death or transfer on death accounts. Unfortunately, once the account is established and funded, many of us forget to revisit the beneficiary designations.
What if you divorce or have children? What if one of your beneficiaries passes away? All of these are important reasons to review your beneficiary designations every few years or when there is a significant life event.
In Maryland, divorce revokes all provisions in a will relating to your spouse. However, divorce will not affect the beneficiary designation on an insurance policy or retirement account. It is important to review all policies and accounts to ensure the beneficiaries are updated following a divorce. Otherwise, you may be leaving a windfall to an ex-husband or an ex-wife.
If your beneficiary dies before you and you do not update your beneficiary designations, the secondary beneficiary will inherit, if you named one at all. If you did not name a secondary beneficiary and your primary beneficiary dies before you, in most circumstances the account will be paid to the estate and the proceeds will need to go through probate. If you do have a secondary beneficiary named when the primary beneficiary dies, the paperwork should still be revisited to ensure both a primary and secondary beneficiary are designated.
If you rolled over an employer sponsored plan, such a 401K or a 403B upon separating from the company or retiring, your beneficiary designations do not carry over to your new IRA. Whether you are setting up a new IRA or rolling over an account into an IRA, it is a good time to verify that your beneficiary designations are updated.
Other considerations are whether you named a minor child or special needs beneficiary to inherit the account. A minor child should not be designated as a beneficiary, because if they inherit, a guardian or a custodian will need to be appointed by the court to manage the asset. Often, it is better to establish a trust for the child’s benefit and designate the trustee of the child’s trust as the beneficiary of the account. If a special needs beneficiary inherits money outright, he or she may become disqualified from receiving public benefits. To avoid jeopardizing the beneficiary’s eligibility, a special needs trust should be established and the trustee of that trust should be designated as the beneficiary of your account.
You will want to update your beneficiary designations if you named beneficiaries before you had children or grandchildren. Although your spouse may be designated as your primary beneficiary, you should determine if adding secondary beneficiaries, such as children or grandchildren, will help achieve your estate planning goals.
An estate planning attorney can assist you in creating or reviewing your estate planning documents, including updating beneficiary designations on your accounts.