What should advisors do when baby boomers or other clients ask to change a beneficiary designation on a financial product?
The impetus could include anything from desire to add a new grandchild or charity to the list, to the intention to remove an heir who is now deceased or who is no longer an appropriate choice; update bequests due to changed circumstance (health, job, financial, etc.); or bring balance to a now-lopsided legacy.
Advisors receiving such requests may encounter no problems at all, says Steven Bosteder, an Addison, Texas-based tax attorney who is corporate vice president at Nautilus Group, an agency membership support group of New York Life Insurance Company.
On the other hand, he says, the process can result in catastrophe.
Much depends on the situation. If there are no significant assets and if the beneficiary is not a minor, beneficiary changes are fairly easy for advisors to handle, says Joshua Meltzer, president of Sentinel Securities, Inc., Reading, Mass.
Also, if the agent has been used primarily for product sales (not advice, etc.), the agent can implement as requested, without much discussion, says Bosteder.
But if assets are significant, the personal situation is complex and/or the advisor/client relationship is of fiduciary nature, beneficiary changes can entail complexities far beyond the routine. In such cases, advisors should ask for more information before proceeding.
Boomers, especially older boomers, may own multiple products with existing named beneficiaries, notes Gerry Goldsholle, a partner in Advocate Law Group, PC, Sausalito, Calif., and a former chief brokerage executive at an insurance carrier. These may include individual life and annuity policies, group life, IRAs, 401(k)s, bank and securities accounts, trusts, etc.
A change of even one of those beneficiaries, if not done carefully, may harm the estate plan, cause problems for heirs and generally not help achieve the person’s goals, he says.
People often don’t factor in all their financial products when making beneficiary decisions, Goldsholle points out. “They forget, overlook or don’t think about some of them. This can cause unintended consequences,” if not addressed.
Compounding matters is the fact that a lot of people rely on beneficiary designations in financial products as a means of bypassing probate and avoiding having to set up an estate plan, observes Meltzer. “That makes them feel good, that they did something” for the heirs, he says. The problem is, without a full plan, they risk increasing their estate taxes as a result, he says.
His view: “If the boomers have no plan, they should set one up first before making any changes to beneficiaries.”
Even if beneficiary-changers do have an estate plan, though, problems can occur, say experts. For instance, it “could mess up the plan” if a client makes a change without first seeking the planner’s input, says Meltzer. Further, if they don’t update the plan periodically, they risk the same outcome.
That’s a good reason to be sure to do annual reviews, says David Littell, professor of taxation at the American College and the Joseph Boettner Chair in Research.
The wide variety in beneficiary forms that exist today can present challenges too. If the client first named beneficiaries many years ago, these forms were likely very simple, with just one line to fill out. Today, many forms allow entry of not only the primary beneficiary but also the contingent and sometimes even contingent to the contingent beneficiaries. The advisor may need to help the client understand the distinctions and even think through the consequences of each choice, say experts.
Reminder: if a primary beneficiary is no longer alive, the contingent becomes the primary. In that case, says Bosteder, the discussion might really be about setting up a new contingent beneficiary.
“You need a fall-back,” he says, because even the first contingent beneficiary could go away.”
Some other considerations:
There are legal issues to consider, says Littell. “For example, most company-sponsored retirement plans–like 401(k)s–say the spouse must receive at least a portion of the death benefit, unless the spouse signs a form waiving that right.” So, advisors working with beneficiary changes in such plans should be asking: “What does your plan provide? Did your spouse agree to this beneficiary change? Do you have the form?”