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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?”

“Be careful on IRA beneficiaries, cautions Goldsholle. Who you name can affect the taxability of the estate. For instance, if the boomer makes the estate the beneficiary, the IRA assets become taxable because the estate can’t carry the IRA forward, he says. “That means the intended beneficiary can’t enjoy the tax-deferred benefit of the account.”

“Qualified disclaimers” need to be factored in, says Bosteder. For instance, if the client bequeaths real estate of significant value to children who are well-off themselves, the asset could disrupt the children’s own financial and estate plans, particularly if they lack liquidity to cover the resulting estate taxes and/or cannot qualify for life insurance to do so. In such cases, the heir may want to sign a qualified disclaimer, he says, so the inheritance can pass to the contingent beneficiary. That means the client should be sure to have a contingent beneficiary.

What is the age of the new beneficiary? asks Bosteder. If the boomer adds a child as beneficiary to an IRA that already has a charity as beneficiary, that decision might impact whether the IRA can be stretched. The executor needs to know the distribution rules to make it happen, he adds, so it’s “critical that the executor understands what to do in such cases, or hires a probate attorney who can handle this.” The advisor should explore the issues with the client.

Many boomers add minor children as contingent beneficiaries to life policies where the spouse is primary beneficiary, points out Goldsholle.

“But if divorce occurs,” he says, “the boomer may then ask to put the kids on the policy as primary beneficiaries, not realizing that, if the kids are still minors at when the parent dies, they can’t receive the life proceeds directly. Under court order, the money goes into a bank trust until they are age 18, at which time it’s typically paid out in a lump sum–which is not something most parents want.”

Even when a product is set up to pay death benefits into a child’s trust, the advisor still should explore the potential outcome, says Bosteder. Say the child has special needs. What are the future needs likely to be? What assets are available to go towards meeting the needs? What is the most appropriate product to use for this? “Perhaps the product the client was considering may not be a good choice,” he says.

Ask, ‘who knows about this change?’ urges Meltzer. “Institutions do keep such records, but 20 to 30 years from now, these (institution-held) records can get lost,” he says. Some employers do hold change-of-beneficiary forms or send them to the trustee, he adds, “but employers lose files too and some go out of business. If the change involves a group life policy, the employer may send the change to the carrier; but if a new carrier is appointed later on, the old forms may not be transferred over and the new carrier may not request new ones.”

The onus, says Meltzer, is on the account owner to keep these records. But, as back up, he says, the boomer could send copies of beneficiary names and forms to the attorney, planner, broker and agent, too, and also let the heirs know where the boomer keeps these documents.

“It can be a wonderful service to the client if the advisor quarterbacks on this,” adds Littell.

Be aware that beneficiary changes can cause problems among the beneficiaries themselves, says Littell. Problems of this kind become harder to straighten out, when a client has money–and therefore beneficiary designations–in different places, as many boomers do, he cautions.

Sometimes, a client’s interpersonal problems spur desire to change beneficiaries. If an advisor gets wind of the problems, such as the boomer wanting to remove a beneficiary who is now into drugs, the advisor might want to suggest considering other ways to solve the problem, says Meltzer. “Or, perhaps suggest getting legal advice first.”

Some clients don’t disclose reasons for the change, notes Bosteder. If the agent was only used for the sale, there is really nothing the agent can do, since the agent doesn’t have visibility to the personal situation, he says. But if the agent does have visibility–say from working with the client for several years–”use what you can see to bring up questions,” he suggests. “For instance, say ‘I want to be sure you understand…’ or ‘have you considered….’”

If the advisor is in fiduciary relationship with or provides planning for the client, however, definitely explore the ramifications, adds Meltzer. “It’s part of the duty to know the customer.”

A prevalent problem involves divorce decrees, says Meltzer. People often assume the divorce voids the beneficiaries named during the marriage, even if the decree says nothing about it, he explains. “But most courts and insurance companies are reluctant to read anything into the designations. They figure, maybe the former spouse wanted this money to go to the ex.” So, if the ex later remarries but leaves the first-marriage designations in place, the 2nd spouse may be unprepared for the news upon the ex’s death. In such cases, the 2nd spouse often goes to court, he says, “but states have ruled in different ways on it.”

Did the estate planning attorney who set up the will also look at the beneficiaries outside the will (in employee benefit plans, for instance)? Not all do, warns Littell. So, a boomer with a will may believe everybody is taken care of when, in fact, several beneficiaries were never considered. This lack of “beneficiary integration” means the plan may fail to meet the boomer’s goals, he warns.

That should not happen, says Littell. “Designations are as important as the will.”

Consider directing boomers to a living trust, suggests Goldsholle. He says these are effective for estates under $2 million and when assets are going to someone other than the spouse. “Living trusts allow real flexibility in who gets what and how. And, to make beneficiary changes, the boomer can make formal amendments.” What about boomers with over $2+ million? Consider an irrevocable life insurance trust, he says.

Befriend the beneficiaries if at all possible, suggests Goldsholle. This should help advisors understand the situation and potentially attract future clients.

Finally, say all the experts, clients need to know that a beneficiary change in a will does not automatically carry through to individual financial documents that have named beneficiaries. The advisor should remind the client to make desired changes in the individual products, too, if the client wants a new beneficiary to receive those proceeds.


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