With certain assets, it doesn’t matter what your will says. Upon your passing, these assets will flow to whomever you elect as the beneficiary of each individual account. Beneficiary elections are made for retirement accounts and insurance contracts.
Typically, these beneficiary elections are made when you establish the account. For certain retirement accounts, these elections may be old, and should be checked periodically to be certain that they still make sense given your dispositive desires for these assets.
The consequences of an improper beneficiary election may be a loss of protection for the asset, adverse income tax consequences or the asset flowing to the wrong person.
Regardless of what you thought you had, the recipient of this account is going to be determined by whatever the account custodian shows on their records as your beneficiary selection. Whether the custodian is wrong or right, their records will determine the flow of the asset.
We all know that financial institutions merge, sell, acquire and go out of business. Sometimes in these major corporate reorganizations, records are lost or destroyed. To determine with absolute certainty that your election is in fact what you want it to be, ask the custodian for written proof of what they are showing for your beneficiary elections. An actual copy of the form they have on file would be ideal. Simply calling and asking what their records show is not adequate – you need absolute confirmation of their records.
Sometimes, circumstances require a change to your prior elections. If you were young at the time of enrolling in your retirement plan, and had no spouse or children, you may have named your siblings or parents as the beneficiary of your IRA or 401K. Just because you may later marry does not automatically update the election. You would need to complete a new form naming your current beneficiary choice and file it with the custodian.
The opposite circumstance may pose an equally daunting problem. Should your marriage end through divorce, your retirement accounts will still flow to the former spouse unless you update the election. After the fact, there is little you can do about an incorrect or out of date beneficiary election.
If your primary beneficiary has predeceased you, the assets will automatically flow to the contingent beneficiary(s) chosen. Absent a contingent beneficiary being named, the asset will flow directly to your estate which would subject the asset to current income taxation as well as the drudgery of the probate process. Don’t ignore or overlook this important second layer of protection.
Sometimes an improper election can subject the asset to unnecessary risk. A named beneficiary who is disabled or insolvent at the time of your passing may subject the asset to their health care bills or other liabilities. Similarly, leaving substantial sums via a beneficiary election to a very young child may make those assets fully available to the child when reaching age 18. For most 18-year-olds, knowing that this much money is waiting for them can spell disaster.
John P. Napolitano CFP®, CPA, PFS, MST is Founder and Chairman of Napier Financial in Braintree, MA. Visit napierfinancial.com for more information. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Legal counsel should be consulted for specific advice or recommendations about any individual’s personal legal circumstances. Investment and financial planning advice offered through US Financial Advisors and Great Valley Advisor Group, Registered Investment Advisors.