Take a minute and imagine the following scenario: your ex-spouse was listed as beneficiary on a long-forgotten life insurance policy through a former employer that you haven't reviewed in 5 or 10 years. You are now re-married with two minor children. If circumstances led to your untimely passing, the funds from that policy may not go to your children or spouse. It may go directly to your ex-spouse. (While there is a law in Minnesota that allows for automatic revocation of beneficiary designation upon divorce, there are important exceptions which I won't go into here. Better to be safe than sorry.)
Whether or not you have a Will or estate plan in place, reviewing your beneficiary designations every few years is always a good idea. It is the easiest way to ensure that these assets transfer to the individuals you want to inherit them. Maybe you never got around to listing anyone as a beneficiary. Maybe you had a child, got a divorce, or otherwise want to remove the person currently listed as a beneficiary.
By "Beneficiary Designations", I'm referring to those accounts or insurance policies (often called non-probate assets) in which you can choose who receives the benefits of the account in the event of your death. Some common examples include qualified retirement plans (such as 401(k) or 403(b) plans), IRAs, and life insurance policies. For each of these types of accounts, you can name a primary and contingent beneficiary (or beneficiaries). Upon your death, the assets in the account are distributed to the primary beneficiary unless they died before you. In that case, the contingent beneficiary would receive the assets instead.
Bottom line: take the time to review your beneficiary designations each time you review your estate plan or a significant life event occurs. It only takes a few minutes but it can have a significant impact on your loved ones.
Here are a few other potential mistakes to watch out for:
- Listing a parent as beneficiary after getting married and having children.
- Not having a contingent or secondary beneficiary.
- Naming a minor (or even a young adult) directly as a beneficiary instead of a trust for their benefit.
- Designating a trust that does not exist or is outdated as beneficiary.
Please remember, this post provides educational information only and in no way constitutes legal advice.