By: Anne M. Hamilton
The unintended transfer of an asset by an out of date beneficiary designation is one reason why a regular review of an estate plan is critical. In the last three to five years have you experienced any of the following: change in your job, loss of a loved one, changed ownership at your financial institution, a new addition to your family, or had a loved one become disabled? If you have answered “yes” to any of these questions, have you also reviewed the beneficiary designation on your employer sponsored plan, IRA, life insurance policies, bank accounts, brokerage accounts, annuities and 529 plans as a part of your estate plan? Beneficiary designations must be updated to reflect your current estate plan.
You may have created an unintended estate plan by failing to review your existing beneficiary designation on any one or more of the aforementioned assets after such a change because a beneficiary designation supersedes any instruction left in a Last Will and Testament. A will reflects the testator’s wishes with respect to probate assets, but assets such as life insurance and retirement accounts are generally non-probate assets because they are contractual and controlled by the beneficiary designation rather than by the testator’s will.
For example, if you changed jobs and rolled over a retirement plan to a new employer’s plan or IRA, did you review and update the beneficiary designation on the new plan and/or IRA? Failing to do so may have unintended estate planning and tax consequences. If a beneficiary is not designated on the retirement plan or IRA, your estate may become the default beneficiary, which could expose your estate to a significant income tax and an unintended distribution scheme. The retirement account you may have intended solely to benefit your spouse may now pass as part under the terms of your will and benefit others, and not just solely your spouse.
If you are divorced and fail to change the designated beneficiary on a retirement account, life insurance, or annuity from a former spouse to a child or new spouse, at your death the asset will pass pursuant to the beneficiary designation – the former spouse, a consequence usually not intended.
Additionally, some assets, which typically do not have a beneficiary designation, such as a bank account, may now have a TOD (transfer on death) or POD (pay of death) beneficiary designation. Perhaps your spouse recently passed and you changed your will to reflect that all your assets now pass equally to your children; however, you forgot you had added a TOD designation on your bank account, naming only one child. At your death, the bank account now passes to the child named as the TOD beneficiary, and not equally among all your children. Another complication, if the child is disabled and receiving governmental assistance is that the asset the disabled child received under the TOD designation has potentially now disqualified the child from continued benefits.
Always remember to revisit your beneficiary designations as part of your estate planning review. Failure to review and revise beneficiary designations can result in undesirable and perhaps costly consequences.