If I have a Will, Do I Need Beneficiary Designations on My Life Insurance and Retirement Accounts?
Yes. Beneficiary designations on life insurance and retirement accounts govern how that asset will be distributed upon death. The Will does not pertain to these assets; they are called "Non-Probate Assets".
Beneficiary designations are needed on all life insurance policies, annuities, and retirement accounts. Having the correct beneficiary designated on these is as important as having Estate Planning documents. What some people do not realize is that the beneficiary designation will always govern the distribution of that asset. On a very regular basis, we find that the beneficiary designations are either missing or are old. Some of the more common problems that we see with beneficiary designations are the following:
Having an old beneficiary designation
It is very common on life insurance policies to see that one spouse has named his or her parents as the beneficiaries. This is normally done because the policy is purchased prior to marriage. For example, husband may designate his parents or a sibling as the beneficiary and simply forget to make the beneficiary designation change after marriage. If this is done, the life insurance proceeds will be distributed to whoever is designated as the beneficiary. This is true even if there is a spouse or children.
Naming minor children as beneficiaries
It is very common to see minor children named as beneficiaries under both life insurance policies and retirement accounts. Typically we will see a beneficiary designation that names the spouse as the primary beneficiary and the minor children as contingent beneficiaries. This can cause significant problems in the event that payment needs to be made to the contingent beneficiaries. For example, if a minor child is a beneficiary under a life insurance policy, and the same is to be paid as a result of the death of the owner, the insurance company is not permitted to distribute money to a minor child.
Instead, the insurance company will turn over the money to the Orphans' Court in the county in which the children reside. The Orphans' Court will hold this money in a guardianship account until the minor children turn age 18. Once the minor child turns 18, the minor child will be given a check for the amount of the proceeds and any interest that was earned on that money. Typically, my clients do not wish to turn over money to an 18 year old child.
This can be avoided by changing the beneficiary designation to a testamentary trust that is set up in your Will. It is a very common practice to have a testamentary trust in the event that you have minor children.
Having no beneficiary designation
Occasionally we will see either life insurance policies or retirement accounts that have no beneficiary designation. This means that the proceeds from the policy or account will now need to go through Probate. In most instances you want to make certain that you take advantage of being able to designate a beneficiary on both life insurance and retirement accounts. This is especially true with respect to designations of your spouse.
In summary, you need to make certain that you check all of your beneficiary designations on all life insurance, retirement and investment accounts. You can do this simply by contacting the account holder and requesting a copy of your current beneficiary designation form. If it does not appear to be correct to you, you are permitted to request a change of beneficiary designation form. This form should be properly completed and submitted to the account holder. These documents should also be kept with your estate planning documents so that all of your family members are familiar with the beneficiary designations on these policies and/or accounts. Please remember that as part of our Estate Planning Package, we do review all of the beneficiary designation forms with you.
If you are interested in scheduling an appointment to review your beneficiary designation forms or to prepare estate planning documents please use our convenient contact form or call our office at 724-836-3300.