Beneficiaries – Your Obligation To Monitor

When you purchase a life insurance policy, write your will, or set up an IRA retirement account, you go through the process of naming a beneficiary to the account. It is on your mind and part of the process to set up the account and you take care of it. Hopefully, you have also named a contingent beneficiary in the event the first named beneficiary predeceases you. But time passes us all by and things change. Life changes with births and deaths and also with marriages and divorces. It may have literally been years since you looked at your documents and considered if your named beneficiaries are still fitting your needs and purposes.

I often ask “do you positively know, for sure, beyond any doubt, who are the primary and contingent beneficiaries of your IRA account?” I asked this question the other day and I could tell there was clearly a pause of uncertainty. What brought about this discussion was that a semi forgotten IRA account that had not been thought about for quite a few years had raised its head. (By quite a few years, I mean enough years had passed that he a gotten married, had a child who was now a teenager, was now divorced from the teenager’s mother, and has remarried.) Obviously, a large block of time has passed.

There was concern in his mind that this IRA account, which had been out of sight and therefore out of mind for so many years, may not have the appropriate beneficiary designations. My first recommendation was that he immediately contact the IRA custodian and ask them what the IRA account documents had as the CURRENT beneficiary designations. He told me that this particular IRA account was probably set up around the time that he married the teenager’s mother or maybe before – he was not sure and could not remember. Upon checking with the IRA custodian, he learned that he had set up the IRA account before he had married the teenager’s mother and that he had named his parents (the teenager’s grandparents) as the primary and contingent beneficiary.

I asked the IRA account owner if this is still what he wanted to have happen in the event of his death. He told me that while he was talking with the IRA custodian he had taken steps to revise and bring the beneficiary designations up to date. GOOD JOB!!!

This is a true story from just a couple of weeks ago. It points out the responsibility you have to continuously monitor your beneficiary designations. You have spent a lot of time to accumulate assets and wealth and you have an obligation to make sure that they will continue to serve your survivors appropriately.

Can you imagine the problem that would have occurred if something had happened to the owner and the primary beneficiary would have been his first wife who he is no longer married to? The decedent’s last will and testament will not override the IRA document. Even if your will leaves the IRA account to a named beneficiary, this will not override the named beneficiary contained in the IRA beneficiary distribution forms. The IRA custodian has no choice but to follow the beneficiary designations that are named in the IRA custodial agreements and give the account to the named beneficiary in the account documents. In many cases, the IRA custodial document has a default provision which states how the funds will be paid out when the funds cannot be given to a beneficiary because they have predeceased the account owner. The last thing an IRA custodian wants is funds they are unable to distribute so they will give themselves an out in their agreements. Do you know what your document has as its default provision and is it acceptable to you? You better check!!!

Many times account owners avoid the issue because they do not know what to do about a certain or particular beneficiary. The person in question may be a very young child; possibly a child that has some issues that are causing the child a problem; or the situation is one person needs some benefit now and another person will need a benefit several years later. While a trust can be dangerous in an IRA if not properly dealt with, they are a powerful TOOL to handle problems such as these. You must deal with a trust properly. Keep the option of using a trust in mind. Don’t forget about using a trust as a tool. It just may be the ace up your sleeve.

The same conversation also applies to life insurance, which has similar situations, problems, and issues regarding beneficiaries. Do you know who your life insurance beneficiaries are and are they as you want and need them to be?

Naturally, your last will and testament and also your trust, if you are using this tool, will have beneficiary designations. You want to review these beneficiary designations and get them right.

Once you pass away, you will not be able to step in and resolve a conflict where beneficiary designations did not go as they should have or needed to (and you won’t be around to hear the red headed ex daughter-in-law that nobody in the family ever liked say that she always knew that her now deceased ex father-in-law always thought the world of her).