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Time to Check Your Beneficiary Designations

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For 2022, the federal estate tax exemption is $12.06 million (effectively $24.12 million for a married couple). With such a generous exemption, you might assume that you don’t need to worry about the federal estate tax if you die. Plus, after taking a beating in the stock market this year, the assets in your estate may be worth significantly less than they were a year ago. But there are still some important reasons to develop and maintain a comprehensive estate plan. One estate planning issue that requires your ongoing attention is beneficiary designations.   

Complete the Paperwork

Incomplete or outdated forms can cause major problems later. Double check whether you’ve completed required forms to designate beneficiaries for the following:

  • Bank accounts, 
  • Brokerage firm accounts, 
  • Tax-favored retirement accounts, 
  • Company benefit plans, 
  • Life insurance policies, 
  • Annuities, and 
  • Section 529 college savings accounts.

If the forms haven’t been submitted, complete them now. If the forms you turned in earlier are now out of date—for example, if you’ve had a child, gotten married or filed for divorce—change them to reflect your current situation before it’s too late. (See “Beneficiary Fail Horror Stories,” below.)

Think Beyond Divorce

Divorce is the most obvious situation in which failing to submit or update beneficiary designation forms can cause big problems. But it can wreak havoc in other situations, too. 

For example, the same basic issue exists if you become estranged from an adult child. Or you might now want to leave more life insurance benefits to an adult child who just had twins and less to your childless offspring. When circumstances in your life change, you may need to refresh your beneficiary designations.  

There’s another key reason to designate beneficiaries: It helps avoid probate. Funds go directly to the beneficiaries you’ve named. But if you’re depending on your will to direct money to the intended parties, all you’ve done is set up your estate to go through the time-consuming and expensive process of court-supervised probate. No money will be distributed to the intended recipients until the probate process says so.   

Also consider naming contingent beneficiaries. These are individuals who stand in line behind your primary beneficiaries. A contingent beneficiary can collect if a primary beneficiary dies before you do. The most common contingent beneficiaries are grandchildren who would inherit if their parents die before you.

Important: Don’t rely on a will or living trust to override outdated beneficiary designations. As a general rule, whoever is named on the most-recent beneficiary form will get the money automatically if you die — regardless of what other documents might say. In some cases, keeping beneficiary designations up to date can eliminate the need for a will.           

How to Update Beneficiaries

Updating beneficiaries may seem like a daunting task. But the hardest part is just convincing yourself it’s time to start. 

For example, with a bank and brokerage firm account, you just need to fill out and submit a transfer on death (TOD) or payable on death (POD) form to name or change beneficiaries. Likewise, tax-favored retirement accounts, company benefit plans, life insurance policies, annuities and Sec. 529 accounts require you to fill out and submit beneficiary designation forms to name or change beneficiaries.

Special Considerations If You’re Married

In the nine community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—your spouse’s consent may be required to make beneficiary changes to investment accounts and similar items, because most assets accumulated during the marriage are considered to be owned 50/50 by the spouses.

If you’re married and have set up assets with you and your spouse named as joint tenants with right of survivorship, your spouse will automatically take over sole ownership if you die. This is a common ownership arrangement for real property and has the advantage of avoiding probate. So, you may want to consider retitling some assets to be held as joint tenants with right of survivorship.    

Beneficiary Fail Horror Stories

Two Supreme Court decisions demonstrate what could go wrong if your beneficiary designations aren’t complete and updated. In the first case, a man failed to change the beneficiary designations for his Boeing Corporation pension benefits and life insurance policy after his divorce. When he subsequently died in a car accident, the Court ruled 7-2 that the beneficiary designations trumped a state law provision that would have automatically disinherited the ex-wife. So, his ex-wife got the money, and his kids got the bills for an unsuccessful legal fight. (Egelhoff v. Egelhoff, 532 US 141, 2001.)

 In the second case, a man failed to change the beneficiary for his company savings and investment plan from his ex-wife to his daughter. When he died seven years after his divorce was finalized, his ex-wife collected $400,000—even though she had specifically waived any rights to the plan under the couple’s divorce agreement. The man mistakenly believed that the divorce agreement was the last word on the subject, but the company’s plan document stipulated that plan beneficiaries could be changed only by submitting the required form. The Supreme Court unanimously ruled that the outdated beneficiary designation trumped the divorce agreement. (Kennedy Estate v. Plan Administrator for the DuPont Saving and Investment Plan, 555 U.S. 285, 2009.)

 These two Supreme Court decisions drive home a key point: Updating beneficiary designations is important. If you fail to turn in the required form, what you intended may not matter if you pass away. Outdated forms or one-size-fits-all state law may be determinative.

Develop Your Action Plan 

It’s generally a good idea to check your beneficiary designations at least once a year or whenever significant life events occur. Conducting a checkup and making any needed changes usually only takes a few minutes. You can often access the necessary forms online. For assistance with updating beneficiaries and other estate planning needs, contact your SSB tax and financial advisors.

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