Investment News: Reviewing Beneficiary Designations

This month’s investment newsletter brings attention to an area of financial planning that often gets overlooked: beneficiary designations. We tend to focus on the economy, politics, and investment performance—important aspects of financial planning, no doubt. However, one particular lesson from my 28 years as a financial professional taught me that we may sometimes get complacent with other crucial elements of estate planning. It’s a lesson I recently learned through the unfortunate passing of long-time clients, and it’s something that could save you and your family from potential legal and financial headaches. Let me share the story and its takeaways, so you can avoid similar pitfalls.

The Importance of Reviewing Beneficiary Designations

Recently, a long-time client passed away, a situation we are sadly familiar with. What was unusual, though, is that just a few weeks later, her husband also passed away. On her beneficiary designation, she had named her husband as the primary beneficiary and their family trust as the contingent beneficiary. This is a fairly common structure, and it seemed straightforward. However, when their son came to us to assist with the paperwork and claim process, we ran into an unexpected roadblock.

We requested that the insurance company make the check payable to the Trust, per the contingent beneficiary. After all, that was the next in line after her husband’s death. But the company refused. They stated that because the husband, listed as the primary beneficiary, had passed second, the assets were now legally his, and the payout could only go to his estate—not to the Trust.

This came as a surprise to both us and the family, given that both spouses had passed within weeks of each other. Why even have a contingent beneficiary if it wouldn’t apply in this scenario? This situation underscored the nuances of beneficiary law, something I hadn’t fully appreciated despite nearly three decades in this industry.

What You Need to Know About Contingent Beneficiaries

Here’s the critical lesson: contingent beneficiaries are only activated if the primary beneficiary passes before the account holder. In our case, since the husband was still alive when his wife passed, the account legally became his. This means it was now up to him to update the beneficiary designation on his new account.

Unfortunately, the husband passed away before updating his designations. Given the short time frame, it’s understandable why this was overlooked. After all, when someone is dealing with the death of a spouse, updating financial accounts isn’t always the immediate priority. Yet, failing to do so can cause complications, as it did here.

The Consequences of Delay: A Lesson for All

What made this case so unique and tragic was the speed at which both spouses passed. In most cases, surviving spouses are not in a rush to settle accounts or update beneficiaries. However, this unfortunate incident highlighted how quickly circumstances can change.

In response, our office has now changed our procedures. In the past, we took a softer approach, not pushing clients to update accounts immediately after losing a loved one, respecting their emotional state. Moving forward, however, we’re advising clients to update their beneficiary designations as soon as they are capable of making clear decisions. Delaying could have serious consequences, especially when two people pass within a short period of time.

We urge you to prioritize this as well. When a spouse or parent passes, updating estate documents and beneficiary designations should become a top priority. This isn’t just about keeping the paperwork in order—it’s about ensuring that your assets are distributed according to your wishes, without unexpected complications.

Why You Need to Act Quickly After a Loss

It’s crucial that you and your family understand the legalities around beneficiary designations. If you pass away without updating your accounts after your spouse’s death, the situation could lead to your estate becoming more complicated and costly to settle. Designations on life insurance policies, 401(k)s, IRAs, annuities, and other accounts need to be addressed right away. Moreover, your estate executor or trustee should also be made aware of how important it is to settle these matters promptly.

The law (in many states) exists for a reason: it protects the rights of the surviving beneficiary. In our case, if the husband had wanted his assets to go somewhere other than what the Trust specified (such as to a child from another marriage or a charity), he had the right to make that decision because he was still alive when the account became his. This law makes sense, but it also underscores why prompt action is essential.

What You Should Do Now

To avoid these types of issues, here are some steps you should take immediately:

1. Review all beneficiary designations – Take a fresh look at all accounts where you have named a beneficiary, including retirement accounts, life insurance policies, and investment accounts. Make sure they are up to date.
2. Update beneficiaries after any major life event – Whether it’s a marriage, divorce, or the death of a loved one, update your designations as soon as possible.
3. Communicate with your family – Let your children or your executor know where your documents are and who the beneficiaries are. Make sure they understand the importance of settling these matters quickly should something happen to you.
4. Consider working with an estate planning professional – Even if you have named beneficiaries, you may still want to update or modify your Trust or Will. This ensures everything aligns with your current wishes.

Final Thoughts

In the world of financial planning, we often focus on growing our investments and securing our futures. However, it’s just as important to ensure that your hard-earned assets end up where you intend them to go after you pass. The case I shared is a rare one, but it is a powerful reminder that estate planning must be a priority, particularly after a major life event. Make it a point to regularly review your beneficiary designations and ensure your estate is in good order. Your family will thank you for it.