When Financial Documents Don’t Agree

The Importance of Updating Your Paperwork

When Financial Documents Don’t Agree
February 12, 2016

You recognize the importance of keeping your will updated in order to make sure your estate is distributed according to your wishes. However, if you are like most people, you probably have not given your beneficiary forms a second thought, whether they are for your IRA or 401(k) plan, life insurance policy, bank accounts, CDs, or equities listed under a POD/TOD (payable/transfer upon death) status.

For many people, the majority of assets are in retirement accounts, and these are directed to the beneficiaries listed on the forms – bypassing wills. Beneficiary forms trump wills, so it is extremely important to make sure that all of these forms match.

This situation recently cost the children of a Texas man $400,000 in benefits. He had intended to leave his remaining retirement funds to his children after he died, but he did not list the names of his children and their designated percentages on the IRA beneficiary form – instead he directed that the IRA be distributed according to his will. Unfortunately, he filled out the beneficiary form incorrectly, invalidating it and making his spouse the default beneficiary, regardless of the contents of his will.

It is very important to update ALL of your paperwork after a major event such as a birth, death, divorce or marriage. Even job losses and conversions from traditional to Roth IRAs require updating beneficiary forms ¬– they do not automatically roll over.

This is even more critical if you do not intend to leave your retirement or other beneficiary accounts to your spouse – or ex-spouse. Many laws at state and federal level are skewed toward protecting spouses, and typically, for 401(k) plans and similar federally governed programs, a spouse will have to sign a waiver consenting to a different beneficiary. This is no simple deal after an acrimonious divorce – prenuptial agreements do not always apply and divorce decrees must be highly specific.

You can make sure your wishes are carried out by following these steps:

  • Fill Out Beneficiary Forms Carefully and Completely – Fill out the forms with care and have them reviewed by the account issuer or plan administrator to make sure they are valid. Designate your beneficiaries precisely.

    It is best to list all beneficiaries by name and designate each beneficiary’s percentage next to their name (or “in equal shares” if you prefer). Adding the phrase “per stirpes” will send that beneficiary’s share to their descendants (instead of directing it to be divided among the surviving beneficiaries).
  • Understand Applicable Laws – For simple estates, all you need to remember is that all of your paperwork must match, otherwise beneficiary forms trump wills. For more complex estates involving trusts, split and blended families, and similar complexities, it is wise to find an estate planner with experience in the laws of your state. Estate proceedings involve a curious blend of state, federal, and local laws, and it is easy to run afoul of more obscure rules at the state and local level.
  • Name Contingency Beneficiaries – If you fail to name contingency beneficiaries and your primary beneficiary passes away before you, your money is passed to your estate, and therefore through probate. Retirement funds will be directed based on the rules of the plan administrator. This can have unpleasant tax ramifications for your heirs. Remember to update your contingency beneficiaries should any of them precede you in death.
  • Keep Good Records – Keep copies of all beneficiary designation forms in a safe place like a safe deposit box at your bank. With mergers, buyouts, name changes and other corporate change mechanisms, you cannot rely on the institutions to have all the correct and updated versions of the forms. Even with a professional estate plan, it is up to you to maintain the forms and account for any changes – otherwise your carefully constructed plan can fall apart.
  • Update Forms Regularly – Scheduling a specific date every year to check your paperwork is well worth the effort – if not for you, then certainly for your heirs.

Finally, seek professional help if you need it. Estate planning is not always straightforward. Do the right thing and have your plan set up correctly, so you can leave your heirs your assets instead of your problems.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

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