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They're getting what? Keep your beneficiaries up to date

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The hypothetical situations in this article are based on actual events, and serve as cautionary examples of what could happen if you forget to keep your beneficiary designations updated.

At some point, you’ve probably been advised of the importance of “having your affairs in order,” but you may not know exactly what that means — and may not have the time or interest to find out. While it’s common to think you have plenty of time to “get to it,” the following examples illustrate that when it comes time to administer your estate, an ounce of prevention is worth a pound of cure.

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“Any time there is a life event in the family, such as a change of job, divorce, marriage, or birth of a child or grandchild, you should re-review your beneficiary designations,” says Debra Greenberg, Director, Personal Retirement Solutions at Bank of America Merrill Lynch.

Exes and woes

When Maria died after a brief illness, her husband Henry expected that he would inherit the money in her workplace retirement plan. In fact, during her illness, he and Maria discussed how he could use the money to help him adjust to the loss of her income. Imagine Henry’s surprise when he learned that Maria’s first husband Ron would be inheriting the funds instead.

Why? Because Maria never updated her beneficiary designations when she divorced Ron and married Henry.1 Despite the fact that they had been divorced for well over a decade, and Maria’s will left all of her assets to Henry, Ron was still listed as the beneficiary of her 401(k) account — which amounted to more than a half-million dollars in total!

Don’t assume your “will” will prevail

Situations like the one above underscore why you need to update your beneficiary designations for your financial accounts and life insurance policies whenever you experience a change in your personal life, such as a divorce, marriage or birth of a child. Legally, your will (or other testamentary instrument) may not govern the distribution of proceeds from these accounts and policies. And because your attorney may not be aware of assets other than those governed by your will, it’s your responsibility to make the necessary changes to your beneficiary designations as often as you need to.

In addition, provisions vary from state to state — some automatically eliminate former spouses as beneficiaries, while others don’t. So what’s true for a friend or family member might not be true for you. Research the laws that apply to your situation and consider confirming your understanding of them with a professional, such as an estate-planning attorney, insurance professional, financial advisor or your company’s HR representative.

Life can be complicated

There was a time when deciding who could, or should, inherit your wealth was fairly straightforward, but times have changed. Careful planning is necessary to ensure that your loved ones are well taken care of. Consider these three examples that might trigger a change to your beneficiary designations:

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Leaving retirement assets to someone other than your spouse – Priya, a 62-year old widow, recently remarried. Although Keenan, her new husband, is a little bit older, he was not married previously and has no children. Both have contributed to their workplace retirement plans for years and with Priya’s inheritance of her first husband’s assets, they are financially comfortable. Their decision to make Priya’s children primary beneficiaries of her 401(k) account was an easy one — but executing it took a little bit of work. After naming her children as her primary beneficiaries, with current and any future grandchildren as secondary, or “contingent,” beneficiaries, Keenan — who is legally assumed to be Priya’s primary beneficiary — was required to sign a document acknowledging her choice of beneficiaries and waiving his rights to the account.2

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The birth of a child – Kim and Josh just welcomed their first child. Working with an attorney to adjust their estate plan to consider their new role as parents, they decided to maintain their existing spousal designations as primary beneficiaries of their accounts. However, their attorney helped them create a trust for their son and any future children. He also suggested that they name the trust as the contingent beneficiary on all their accounts to provide for their family in the event of their deaths.

The death of a beneficiary – Assuming she would pre-decease them, Willa, a widow, selected her two much younger brothers as the primary beneficiaries of her life insurance policy, while naming their spouses as contingent beneficiaries. Many years later when her brother Jed died unexpectedly, Willa was reminded of her decision to designate Jed’s now ex-wife contingent beneficiary of her policy. With her surviving brother financially secure, Willa decided to update her designations to name her niece and nephew as primary beneficiaries and her brother as contingent beneficiary.

And there’s more

Here are more tips for keeping it “all in the family,” or at least among the people you care about most, when life changes occur:

  • If you change jobs and roll over your retirement money to a new account, make sure the new account carries the correct beneficiaries. Keep in mind that your previous beneficiary designations generally will not automatically move with your assets.
  • If your primary beneficiary dies, your secondary or contingent beneficiary moves up in line, and you’ll want to consider naming a new contingent beneficiary.
  • If your beneficiary becomes disabled, you should consult a tax professional to understand the impact the inheritance could have on your beneficiary’s eligibility for Social Security Supplemental Security Income program and other benefits. In the long run, the inheritance received from you may make him or her ineligible for other financial support. If these are your circumstances, consider talking to a tax or estate-planning attorney to explore the possibility of naming a “special needs trust” as your beneficiary. Doing so may help you provide for your loved one without affecting this person’s eligibility for other financial support.

As you can see, it’s very important to review your beneficiary choices as part of your overall estate plan. Be sure to check your designations periodically, even if you haven’t experienced a major life event. Keeping your beneficiaries up to date will ensure your hard-earned assets are passed to your intended heirs.

Learn more and take action

  • Learn how planning ahead and taking the time to draft a will or trust can help you leave a meaningful legacy. Read "Helping your heirs get what they deserve."
  • If your 401(k) plan is through Merrill Lynch, name or update your beneficiary at Benefits OnLine®. Once you log in, click on 401(k) Plan > Current Elections and select Beneficiary Designations/Updates from the drop-down menu (Note: Online beneficiary service is not available for all plans). Go to Benefits OnLine® >
 
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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

1 The effect of a divorce on a beneficiary designation will vary from plan to plan. You should familiarize yourself with the rules of the plans in which you participate.

2 The terms governing your beneficiary designation(s) will vary from plan to plan. Please review the terms of your plan(s) carefully and, if needed, consult a professional advisor such as a tax or estate-planning attorney.

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