It’s yet another form in that seemingly endless pile of paperwork needed to complete the application. It’s usually only one page and while most clients don’t seem to think about it too much, others will want to get back to you on their choices — another delay to getting business processed. Since the beneficiary form can be changed at any time, does it really matter what the client decides when processing the paperwork?
Of course it does — for two important reasons. First, as more and more assets pass by beneficiary designation, this form has become the client’s primary method of passing assets to their beneficiaries. Second, clients rarely initiate changes in beneficiary designations, so a “temporary” solution may become permanent, perhaps with unintended results.
The increasing importance of beneficiary designations
The scope of property passing by designation has increased significantly in recent years. Traditionally, this property was limited to life insurance, annuities, retirement accounts and bank accounts. More recent additions include all types of financial and securities accounts, and even real estate in some states.
Some of the accounts may be designated as “Transfer on Death” or “Payable on Death,” but the result is generally the same. It is the beneficiary designation and not the will that controls the disposition of this property at death. Consequently, clients may find that few assets actually pass pursuant to traditional estate planning documents.
Since, as a matter of contract law, the property passes according to the designated beneficiary, the account agreement can impose restrictions and controls on the disposition of property. Acceptance of the beneficiary designation is at the discretion of the company; and designations that are long or complicated may be rejected or require additional documentation.
It is important to ensure that procedures are followed. In general, a beneficiary designation is not effective until it is received and accepted by the company. Simply mailing the form may not be sufficient; advisors should follow up with the company to ensure that the beneficiary designation is properly recorded.
So what started out as the easiest form to complete in the account set-up paperwork requires a lot more time and thought. Advisors can set themselves apart by demonstrating that they understand the importance of the beneficiary designation and issues associated with “keeping it simple.” And once the beneficiary designation is set up, it is only good if it reflects the clients’ current wishes.
Circumstances change: The need for the beneficiary designation review
An IRA payable to a former boyfriend? Life insurance payable to parents rather than the wife and children? An annuity payable to a former spouse, a long dead relative or a former best friend who is now married to an ex-spouse?
The beneficiary designation may have been appropriate at the time — but times change. If you or the client thinks an outdated beneficiary will “do the right thing” and hand over the money, think again. While it does happen, many cases prove otherwise. The following are four common life changes to keep tabs on.
(1) Change in marital status
If the client is getting married for the first time, then he or she may want to change the beneficiary to the spouse; however, this change may be less likely if it is a second or later marriage. While naming the spouse as beneficiary is generally easy for accounts with current employers such as life insurance and retirement benefits, accounts at former employers or amounts that have been rolled over from former employers often get forgotten.
More frequently, problems usually arise when the client gets divorced. In some states, beneficiary designations cannot be changed until the divorce becomes final. In other states a divorce has the effect of cancelling all revocable designations for the former spouse. However, sometimes the former spouse has to be named as beneficiary while the children are minors. To avoid any uncertainty, your clients should update their beneficiary designations.
(2) Birth or adoption of children or grandchildren
The birth or adoption of the first child usually prompts a major review of the estate plan and the need for new contingent beneficiaries. If a child is named individually (rather than as a member of a “my children” class), then the designation will need to be reviewed and possibly updated as additional children are born.
The same considerations apply to grandchildren. If children are adopted, it may be necessary to ensure they are included in the definition of children.
(3) Death of beneficiaries
The death of a spouse will likely prompt a major review of the beneficiary designations as property will now generally be passing to the next generation at the death of the client. Distribution options will have to be carefully considered as alternatives for children and/or trusts for their benefit may result in reduced or significantly different tax and payout consequences.