Life insurance policies and retirement accounts such as IRAs and 401(k)s do not transfer to beneficiaries through your Last Will and Testament. Instead, these fall outside of probate and transfer directly to the beneficiary designated on the account.
You should regularly revisit the beneficiary designations on your life insurance and retirement accounts to ensure they align with your estate planning goals. In addition to these regular reviews, you should ensure your beneficiary designations are up to date and accurate after the following:
You Haven’t Named a Beneficiary Yet
It is not uncommon for policyholders and account owners to forget to name a beneficiary entirely. This means the accounts would have to go through probate. This may also create tax consequences that would be avoided by naming a beneficiary. Some organizations may have “default” beneficiary policies, but the default beneficiary may not align with your estate planning objectives.
You Divorce Your Spouse
Many people remember to update their will after a divorce, but neglect to update beneficiary designations on retirement accounts and life insurance. Laws regarding if an ex-spouse can receive funds from a life insurance policy vary by state. Federal law governs 401(k)s and IRAs and requires the designated beneficiary receive the funds – regardless of the existing relationship to the deceased.
Your Primary Beneficiary Dies
If the primary beneficiary designated on the account predeceases you, update your designations to a new beneficiary. Alternatively, you can name a “contingent beneficiary.” Not only would a contingent beneficiary receive the funds if the primary beneficiary is deceased, but also if the primary beneficiary cannot be located or refuses the inheritance.
Your Children Reach Adulthood
Naming a minor as a direct beneficiary on a retirement account or life insurance policy is generally not advised. In the interim, many people name >a trust intended for the minor as beneficiary on the accounts. As children age, however, you may want to revisit your accounts and list your adult children as primary beneficiaries.
You Named One Child as Beneficiary
If you have more than one child and want your children to spilt funds from your life insurance policy and retirement accounts, you may want to revisit naming one child as sole beneficiary. Beneficiaries are under no legal obligation to split the proceeds, so choosing only one child may lead to family feuds. Additionally, they may not be able to “gift” the proceeds to their other siblings without incurring a gift tax penalty.
Reviewing your beneficiary designations regularly – and after significant life events – ensures the people you care about most will be protected even after you’re gone.