Updating Beneficiaries

You never know what’s going to happen to you. You’ve heard this a thousand times and I don’t have to tell you about the impermanence of life. But while we can’t control the future and the timing of our own demise, we can (mostly) control where our money goes after we do.

We accomplish this by naming beneficiaries on as many of our accounts as possible. They can be added at the bank, on our life insurance policies, and our retirement accounts at work and elsewhere. Not doing so automatically sends an account through the probate process after your death. There’s limited ability to control things in probate, so folks generally try to avoid it.

Naming beneficiaries is so simple that people often overlook it or forget to keep them updated. And passage of the Secure Act at the end of 2019 puts added emphasis on double checking your beneficiaries. Among other things, the Act now requires that non-spouse beneficiaries withdraw all the inherited money within ten years, with a boatload of taxes to go along with it. We discussed some of the implications with this a few weeks back, so I won’t bore you with the details again here.

Instead, let’s think more broadly about reviewing your beneficiaries. It’s a bit morbid perhaps, but for a successful review you need to wrap your mind around two potential scenarios; one, you’ve been “hit by the bus” while crossing the street and it’s lights out immediately, or two; you’re suffering from some sort of mental incapacity that precludes you from doing anything on your own.

In either case you’ve got what you’ve got in terms of named beneficiaries. Still have your ex-wife listed as beneficiary on your retirement accounts? Or, maybe you haven’t listed anyone at all even though you’re remarried and have children from both marriages? Maybe you simply wish you had done something different with beneficiaries. The bottom line is that you have to address this before death or incapacity, not after.

It’s important to remember that each account you own stands alone. You might have a will or maybe you spent thousands working with an estate planning attorney to craft the perfect trust document. But if you never actually updated beneficiaries on your IRA, for example, that account doesn’t automatically fall under the trust. Again, it’s on its own and would go through probate or, if you have stale beneficiary designations, directly to whomever is named, even if you’d currently (from the grave, I guess?) disagree.  

While it might sound a little strange, there’s benefit to these accounts being separate. It gives you the opportunity to get creative. For example, most of us with a spouse and kids simply follow the “spouse gets everything, the kids get what’s left” school of thought. The Secure Act adds complexity here, but not for regular brokerage or bank accounts. Maybe one of your kids needs the money more than another. You could name the kid with lower income as beneficiary of your IRA while the other is named on your brokerage account (for its preferential tax treatment and no ten-year rule). Maybe one of your kids gets the Roth IRA (which would be tax free over ten years) and the other gets your pension (taxed as ordinary income). There are lots of ways to customize this.

But then as we all know, things change. Maybe over time your kids swapped their financial status, or maybe they’re both doing great and you’d like to add a charity or two as beneficiaries. This is why it’s important to check how you have things set up from time to time. You might find that choices you made five or more years ago no longer apply.

Again, and at the risk of being overly redundant, nobody but you can update your beneficiaries. We can help you think about the process and assist with the paperwork, but we can’t do it for you. We used to aim to review this every few years or so, but we’ll now be doing so annually with our ongoing clients. It’s simply too important not to. 

Have questions? Ask me. I can help.