If you’re one of my clients, you’ve heard me urge you to check the beneficiary designations on your various retirement accounts and life insurance policies. The end of this year and beginning of a new year is a good time to make a routine check to see that you have chosen people and charities you still favor. Contact the institutions that hold your accounts, ask them who is on record as your current beneficiaries and, if you want to make a change, request a change-of-beneficiary form. And then don’t neglect to fill it out, submit it to the bank or brokerage company, and request that they provide you with verification that your beneficiary designations reflect your current wishes.
There’s no easier mistake to make than to neglect this important aspect of estate planning.
Regardless of what your Will says, financial institutions are legally obligated to distribute your accounts to whomever you have designated as beneficiary, even if that is an ex-spouse or someone else you no longer care for. If you make the mistake of naming “my estate” instead of actual people or organizations, probate may be required.
Carol was a middle-aged woman who came to me several years ago to make a Will. She was a renter and had few assets, so she did not need a trust. Without children and with a detached relationship to her family, she nominated her best friend Gina to serve as her Executor.
Also in her Will, she named her best friend as beneficiary, to receive the “residue” of her estate, i.e. anything that was not already in the form of a “payable on death” type account.
The bulk of Carol’s estate consisted of retirement accounts and life insurance policies. I instructed Carol to make sure that if she wanted Gina to have funds to pay off bills and also to receive an inheritance, then she needed to make sure that she designated Gina as beneficiary of some of these accounts. I also told her to leave some cash in her accounts without beneficiary designations so that Gina would have money for estate administration.
Carol died unexpectedly and Gina took immediate action to start collecting Carol’s assets and paying off Carol’s bills. But she quickly learned that her best friend Carol had named other friends and non-profit organizations as beneficiaries on all of her bank accounts. There was virtually no available cash for Gina to use to pay bills, let alone receive as a gift.
This put Gina in the untenable position of having to use her own money to pay for Carol’s burial and funeral, which she did. But Gina did not have the wherewithal to continue to serve as Executor. She declined to serve and let Carol’s alternate nominee take over.
All of this could have been avoided if Carol had thought about how to correctly use beneficiary designations consistent with her stated wish to leave a gift to her friend.
