Broker Check

Importance of Regularly Reviewing Beneficiary Designations

| February 21, 2017

There’s a bit of administrative business that can have impactful consequences if not dealt with in a timely manner: naming and/or updating beneficiaries and the various types of beneficiary designations.

Let’s take a look at a hypothetical case study.  John and Joanne Johnson are currently married and each has both a Traditional IRA and an individual investment account.  John also has a 401(k) at his employer of 30 years.  John opened his 401(k) and IRA when he was married to his first wife and has neglected to update the beneficiary designations to Joanne.  John has also not named beneficiaries for his individual investment account.  Joanne on the other hand is all up to date:  John is the primary beneficiary on both her IRA and investment account.  They both have updated estate documents, including wills. 

If John were to pass away without making any changes to the situation above, you can probably see the consequences.  Since qualified retirement plans like 401(k)s and IRAs are passed according to the beneficiary designation on file, it is very possible that John’s ex-wife will be entitled to the assets in those two older accounts that he didn’t update, even if it is not John’s current wish or intention.  Of course Joanne may choose to challenge this in court, but this can be costly with no guarantee of her desired results. 

As for John’s individual investment account, since there is no named beneficiary, this asset will go through probate.  If John had named Joanne as the primary beneficiary through a Transfer on Death (TOD) titling or added Joanne as a Joint Tenant with Rights of Survivorship, this account would bypass probate and transfer directly to Joanne without delay.  Also, many states offer simplified probate proceedings if certain conditions are met, including a limited-size estate.

There’s clearly incredible importance and value of simply filling out a form to update beneficiaries and reviewing these designations on a regular basis to ensure your intentions are always followed.  Has it been a while since you last updated the beneficiaries named on your accounts or have you recently gone through a life change such as marriage, divorce or a death of a loved one?  Then now may be the right time to review the beneficiaries on all of your accounts.    

This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified legal advisor.