Ep. 205 – Why Review Beneficiary Designations Annually
In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the importance of reviewing your beneficiary designation annually. Always checking your beneficiaries in all your accounts and updating your beneficiary forms is the only way to avoid putting your loved ones in difficult scenarios.
Listen in to learn the importance of naming contingent beneficiaries after your primary beneficiaries to ensure everything is clear. You will also learn why you need to consider the tax implications of each account, the needs of your beneficiaries, and its impact on your overall estate plan.
In this episode, find out:
● The importance of always updating your beneficiary designations on all your accounts.
● Understand estate law in your state since they vary from state to state.
● Ensure your beneficiary form is appropriately done and has a primary and a contingent beneficiary.
● Review your beneficiary designations annually by reaching out to institutions.
● Consider the tax implications of each account to understand the proper beneficiary.
● Understand the impact on your overall estate plan to avoid disinheriting your beneficiaries.
● Consider the needs of your beneficiaries and the impact of the assets on their lives.
● Be specific when listing all your beneficiaries to avoid creating any confusion.
● Consult with an attorney as a second set of eyes to help you think through scenarios.
● Consider contingencies if you name a primary beneficiary to avoid future confusion.
● “A lot of accounts can have beneficiaries associated with them. Take a list of all the accounts that you have and start checking to see.”– Murs Tariq
● “It’s your account, your responsibility to reach out to the institution to make sure they’ve got your beneficiary there.”– Radon Stancil
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Here’s the full transcript:
|Welcome everyone, to Secure Your Retirement Podcast. We are certainly glad to be able to talk to you about a topic that we believe is very, very important, and that is reviewing your beneficiary designations. And we believe this should be done annually, so each and every year.
|So really what prompted this for Murs and I to kind of talk about this again because we had a conversation around this back in September of 2022 around beneficiary designations, just the overall what kind of accounts kind of put beneficiaries on and that kind of thing.
|But in this particular situation, there was an article in MarketWatch and it kind of triggered me to go, “Wow, we need to come back and talk about the importance of just reviewing our beneficiary designations.” So I think what I’m going to do is I’m going to kind of start off, I’m going to tell the story and then Murs, if you can tell us your takeaways from it. Okay?
|So here’s the situation. A man has an account worth about $80,000 and he passes away. Well, when he passes away the beneficiary designation, the person designated as the beneficiary was his prior wife. Because he had remarried. So not the current wife, but a prior wife. Now his prior wife though was deceased prior to him. So now she’s not in place.
|So if you leave money behind and the beneficiary is not alive and there’s nobody else listed below them as a contingent, then that money goes to the person’s estate and has to go through the estate, goes through probate, goes through all those things. Well, what makes this story a little bit more interesting is this man has a daughter. And it was her understanding that this was for her.
|This was her. The dad wanted her to have the account. In fact, the stepmother actually sent her a text. And in that text she says, “Your dad wanted you to have this account.” Well, now because the beneficiary wasn’t listed correctly, it goes to the estate. The current wife, her stepmother is the executives of the estate. So later she decides, “You know what? I don’t really think this account was for you.
|I think your dad wanted me to have the account.” So this daughter writes in and says, “What’s the legality here? I got a text from her that says that she agreed on this and now she’s changed her mind. She says she thinks the accounts for her.” So the unfortunate part of this is a text is not going to hold up very good in a legal battle, plus she’s the executives.
|There’s no real proof other than the fact that she says, “I think that’s what your dad would’ve wanted.” And so now the daughter is really not going to be able to get these funds because it’s going through the estate and there’s no clear indication.
|The estate didn’t have her listed on the estate side of things. So to me, this is an example of somebody who basically just forgot and to go back and check their beneficiary designation. So I’m not going to go too much further. That’s the story. So Murs, kind of tell us the take takeaways that you got from this.
|Yeah, I think stories like this are just, they’re terrifying because who knows what the end result the father wanted, but now it’s being decided by someone else. So the best way, and key takeaways here, the best way to avoid this scenario for you or your loved ones is to always be looking to update your beneficiary forms. Always be checking your beneficiaries on all your accounts.
|And remember that a lot of accounts, it’s not just IRAs and not just life insurance and 401ks, A lot of accounts can have beneficiaries associated to them. So take a list of all the accounts that you have and start checking to see, because a checking account can have a beneficiary to it, a savings account can as well.
|It’s not commonly done, but if you do it, it makes your life and the estate process a lot simpler. So always update beneficiaries, especially if you remarry or someone does pass away in the lineage. So that should be something that I think is checked on an annual basis.
|Also, realize that the law, probate law, estate law can vary from state to state, right? So if you hear about one story about how it went down in California and you live in North Carolina, well, it doesn’t matter about California as probate and estate law is going to be state to state. So understand what those rules are for your own state.
|And I think a key one that Radon pointed out is text messages really just aren’t any proof of anything, especially when it comes to money and inheritance. So in the case of the daughter, she’s asking if she can open a probate case to kind of argue that it is her money and try to see if the text message will work.
|We don’t know what the answer to that is, but that takes us to the next thing is that contesting an inheritance, opening a probate case is going to be costly and it’s going to take a long time. So we want to avoid that scenario as best as possible, which all comes back to, you got it, the beneficiary form, let’s make sure that’s done properly.
|In most cases, payments to a beneficiary, a primary beneficiary, if that primary is not around, it’s going to go to a contingent. So in this case, there was no contingent beneficiary assigned. That would’ve made the, the question wouldn’t have been there at all if there was a contingent assigned on the $80,000 inheritance.
|So you want to have a primary and a contingent at the very least. And then if someone is going to pass away without a will, just like in this case, it went to probate court. Basically what probate is, is that there’s a, in all essence, there’s a hierarchy of who’s going to get the asset if there are no wishes that are left behind.
|So you don’t want to leave that up to a judge. The judge doesn’t know you, the judge doesn’t know the family, but they’re going to have to make some decision some way, somehow. So you want to be careful and avoid as best as possible probate.
|And again, that’s going to be different from state to state. So that’s my main takeaways. But obviously number one is the beneficiary form. That’s going to drive everything, that’s going to supersede the will, the beneficiary form on accounts is going to be more important than what the will is going to say about the account.
|All right. So now what we’re going to do is that was the story and the takeaways from the story. But to be very specific, we thought what we’d do is list out seven things, steps that you need to do to manage your beneficiaries. And remember, don’t think, “Oh man, I know this. I know exactly who the beneficiary is.”
|So let’s just go through these seven steps because these will help guide you through this. So number one, review your beneficiary designations annually. Now you might think, “That’s just too often. Why would I do that? I just did it last year.” Well, we believe it’s important.
|In fact, we believe it’s so important for our clients, we have built out a process where we do a beneficiary review each year with our clients. We basically show them who’s listed on every single account, the name, the percentage, the primaries, the contingents, everything that’s on there, and we have it there and we lay it out for them and then they’re able to just sign off saying, “Yep, I agree, that’s what it all is.” So we compile that for our clients.
|So if you’re not a client of ours, and then just do it yourself, just go. And again, what that means is if you’ve got an account and a 401k, maybe you’ve got one at Charles Schwab, maybe you’ve got one at Vanguard, maybe you’ve got an old 401k, whatever it is, you’re going to need to reach out to each one of them. And you ask them who they have as your beneficiaries. Remember, you might find a form that you sent into them where you told them who the beneficiary is, that is not verifying who the beneficiary is.
|It’s your account, your responsibility to reach out to the institution so that you can make sure they got it correctly there. Because it’s possible you could have sent a form in and they never did change it. Now that might be something you could fix, but it would be very difficult for a beneficiary to be able to prove and have that paper trail. So ask the institution to send to you who they have listed as your beneficiary. Do it annually.
|All right. Step number two, you want to consider tax implications. And what I mean by this is you want to understand the accounts that you’re leaving behind and the accounts, the tax classification of the accounts.
|So an IRA is taxed one way, a Roth IRA is taxed another way, real estate’s going to be taxed one way, a taxable or a non-qualified brokerage type of account is going to be taxed another way.
|So you want to understand the implications of each, and that may help you think through, well, who is the proper beneficiary for this type of account? And so the more you understand there, I think the smoother it can make the inheritance process as well for the people that are inheriting.
|Yeah. I think one too, I’ll add on that, and we might talk about this a little bit more on another step as well, but if I am leaving money to, let’s say a son or a daughter who is a very high income earner, and the likelihood is that they’re going to basically take that money, pay a very high tax on it, and then go give it to, in all essence, your grandchildren, there are ways you can set things up so that they don’t have to pay those big taxes, your son or daughter-in-law, if they, daughter rather, if they are high income earners.
|So if you have a high income earning child, you want to make sure that we do a couple steps so that that person has the ability to do what is called disclaiming so that it can go to the children and the children then would inherit it and they could pay it at their tax rate.
|But you don’t have to make that decision. You could let your son or daughter make that decision. When they receive the money, they can make that choice. So there’s ways to do that. So that might be something you want to get more information about. And so I’ll just trigger it again, high income earning beneficiaries, have an extra conversation around taxes.
|All right, number three, understand the impact on your overall estate plan. I think if we think through this one, just remember that, let’s say, and I’m just going to make an illustration here. Let’s say I’ve got a million dollars I’m leaving behind. And let’s say that most of it is in an IRA 401k status, which means I’m going to have beneficiaries on it.
|And let’s say that the remaining part is just going to go through the estate plan. Well, if in one place I say I want this money to go whatever, at some high percentage to one child and then I do 50/50 in the other part of the plan, I could be disinheriting a child in all essence. So I want to look at how overall, what’s the amount. So when we do our beneficiary review, we actually put dollar amounts to it.
|So that means child one is going to get this amount in dollars, child two is going to get this. And then you can look at your estate plan and say, “Okay, how do I want to deal with everything else?” I’ll give you an example of what we just talked about. I was with a client and in the client conversation, the client said, “We’ve got a house in the mountains that my son has never even been to.
|My daughter loves it though. So what we’re thinking about doing is just leaving that house to my daughter.” But I got to think about the whole plan as to how we do that. So I’m going to use, again, a simple illustration. Let’s say that the house was worth 500,000 and let’s say in addition to the house, they had a million dollars, right? In other assets. So that’s a million and a half dollar estate.
|So if he leaves the 500,000, if they leave the $500,000 house to the daughter on her own, well, she doesn’t necessarily now get 50/50 of the million. You see, because 500,000 is she’s getting out of that million five. So it’d be a lower percentage of the remaining million she’s going to get if they want 50 /50 of the total estate to go to the children. So think that through, look at the whole estate plan, not just each little section. So let’s just think that through.
|All right, number four, consider the needs of your beneficiaries. When you’re making these designations, it’s important to consider how the assets and what the assets are that you’re leaving behind, how that will impact their lives. So go back to the one example Radon gave of the high income earning son or daughter.
|And they really don’t need the inheritance, but you want to leave them the equal amount that you’re leaving their other sibling. Right? So you’re leaving them the money. And in that example, we want to also make sure we’re setting up the beneficiaries, like he said, so that we can potentially, that high income earning son or daughter has the ability to disclaim and send it down the line to their kids at a lower tax rate.
|So that’s one that you want to think about it from their perspective because they’re saying, “Oh man, I’m so happy I got this money, but I just don’t need this money. The kids could.” And so as long as they have the ability to disclaim, that’s a possibility.
|Another one to think about is if you have a special needs beneficiary, sometimes special needs beneficiaries are under some certain subsidies, whether through social security disability or through Medicaid or anything like that. So some subsidies, if they come into an inheritance in the wrong way, well, then some of those subsidies could go away. Some of those things that are helping them out could go away.
|So that usually involves some trust type stuff, and you would talk to an attorney about that type of structuring. But you want to be careful about that. Another one is, and this one I think is more common, is, well, you want to leave money behind to the kids, and but you just have one child that is a spend thrift in the sense that they’re not financially all that good with their own money.
|And you’re worried that if they get it too early of an age, say in their early twenties or early thirties, that if they inherit 500,000, they’re going to go and spend it right away and they’re going to struggle on with the rest of their financial lives.
|So that is something to consider. And there are ways that you can structure how they receive the money as well. You’re kind of making that decision for them, which again, is going to involve a trust and talking with an attorney. But those are some ones that come to mind that you want to consider, not just the fact that you want to leave money behind, but how do you want to leave money behind and the impacts that it leaves on the receivers of the inheritance.
|All right. Our next one is be specific. What that means, I’ll just give you an example. Let’s say that your intent is that you would like to leave a certain amount of money. I’m going to use 25% straight to the grandkids, or you want it to go to the grandkids.
|It is better to list them as beneficiaries than to basically tell my son or daughter, “Hey, I want 25% of this to go to the grandkids, so give it to them.” Okay? And that’s not because that the son or daughter is going to necessarily not do your wishes, but it could be confusing. They might forget. There could be all kinds of scenarios. So I just say, be specific. And you can do that super easy.
|All you got to do is say 75% goes to your children and then 25%, and you just list out the grandchildren all as primary beneficiaries. And then that way there’s no confusion whatsoever. And if you’ve got two or three grandchildren, you just have to put that out as percentages even to them as well. So just take the time to list all of your beneficiaries.
|Number six, you want to consult with an attorney, especially if you’re having trouble making a decision or don’t understand how things are going to play out. An attorney is going to be a second set of eyes. They’re going to help you think through scenarios. They’re very experienced in this.
|I know attorneys that won’t draft their own documents themselves. Even though they’re completely, perfectly capable to, they want to walk through it with another professional so that they can have a second set of eyes on things. And so that, I think that’ll be important.
|They’ll help you think through not just beneficiaries, but the estate plan in general, which we believe is a will, the power of attorneys, durable and healthcare, HIPAA documents for medical releases.
|And then if there’s a need for a trust, they’re going to help you think through that as well. So you always want to resort to them, I would say. You can hear about the people writing their wills on a sticky note and stuff like that. And while that can hold up, I wouldn’t rely on it too. You want something that is legally drafted by an attorney.
|All right, this leads us to our final one. Number seven, consider contingencies. Now we could tie our story back here if we wanted to, how we opened up this particular episode. If you name a primary, I always say name a contingent.
|And the reason why is that if for some reason you got sick, you didn’t remember to go and check your beneficiaries annually, the contingency basically says if your primary beneficiary is not alive, they’re not there, the contingency then is already there. So go back to our story. Had the dad listed the mom as the primary and then listed the daughter as a contingent, it would’ve not gone to the estate.
|It would’ve basically looked and said, “Hey, the primary is not in place. It automatically goes down to the contingent.” And it would’ve avoid all that confusion. It would’ve been super clear and easy. Now what if he had named the beneficiary so long ago that the daughter wasn’t alive? Is there a way to kind of have a contingency even for those that are not born yet?
|So for example, grandchildren, maybe you’re leaving some money to your children, your son or daughter, and you say, “Well, if they’re not in place, I want it to go to their kids.” But we don’t really know who all their kids are yet. Maybe they’re young enough, they’re still having kids. There’s a way that you can do that. And basically, if the institution will let you, most will, you can put the name of your primary beneficiary and then say per stirpes after that. So that’s P-E-R stirpes, S-T, is it E-R or I-R?
|Yeah. Yeah. Thank you. So per stirpes. And what that means is, is that if the primary’s not in play, it goes down equally to their descendants. So let’s just imagine that you had left this account to your son or daughter, and they had two children, right? Then what’s going to occur is if your beneficiary’s not there, it’s going to go 50/50 to each of those children. And we don’t have to even think about naming them or anything.
|They don’t have to be there if we have that per stirpes, it’s just going to drive it down. Okay? Always have a contingency, even if you don’t know that the contingencies are there yet. Okay? It’ll always help out in that particular category. We hope this was helpful.
|We know that this, you think about this scenario, it’s kind of sounds sad that a daughter thinks that, “Hey, this is supposed to go there.” But confusion can lead to sadness so let’s be specific. And then that way we have our wishes taken care of, and we make sure that our loved ones know that that was our intent. Because had he said it, he said all that, then the daughter could just say, “Hey, dad decided not to leave me the money.”
|She could rest at that. But if you think that what’s supposed to come to you, and now you can only imagine the relationship she feels now toward her stepmom. So we hope this has been helpful. We have a whole blog written on this, so you can go to our website, pomwealth.net, go to the blog page.
|If you’re thinking to yourself, “I’d like to talk to you a little bit about this,” you can also go to our website. Go to the top right-hand corner, click on schedule call, and our calendar comes right up, and you can get right on our calendar and have a conversation with myself or Murs. And we do that at no obligation, completely complimentary. We hope you have a great day, a great week. We’ll talk to you again next Monday.