Focus on finance: Tips on updating beneficiaries

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By Steve Wright

Question: I just updated my will naming my new wife as sole beneficiary. Do I need to also update my 401(k) and life insurance beneficiary or will updating my will suffice?

Answer: Neglecting to update beneficiaries, or failing to name them, may leave life insurance and retirement accounts to unintended recipients, create probate expenses and cause tax problems. Having a will does not avoid these issues. The best prevention is having updated beneficiary designations.

Beneficiary designations, for all types of retirement plans (IRA, 401k, 403b, etc.) and life insurance, will supersede any distribution instructions in a will or trust.

Here are beneficiary designations to avoid:

  • Except for special circumstances, never name your estate as the beneficiary or permit your estate to become the beneficiary by default. Doing so deprives the ultimate beneficiary of your estate of significant income-tax benefits and strips the assets of their protection against the claims of creditors.
  • Never name a friend as beneficiary with the promise to use the money for your child. The problem is your friend has no legal obligation to use the money for your child; if your friend gets a judgment against him or her, creditors may take the money; if your friend dies or divorces, the spouse, not your child, may get the money.
  • Never name an irresponsible adult as beneficiary. The beneficiary may waste the money.
  • Never name a disabled adult who can receive SSI or Medicaid as beneficiary. Receiving the money may result in a loss of their benefits.

If you are married with children, in most cases, you would name your spouse as primary beneficiary and children as contingent beneficiaries. However, if you have a disabled child or irresponsible adult children you may want to name a trust as contingent beneficiary. Naming a trust as beneficiary allows you to select the trustee who will be legally obligated for managing and spending the money in the trust for the benefit of the beneficiaries. You choose the trust terms for how the money is to be distributed. A well-drafted trust will preserve the beneficiary eligibility for public assistance.

The most important goal is not to let your estate become the beneficiary and thus land in probate. As an example an IRA left to an estate shortens the tax deferral life of the IRA as there are time limits for distributions.

These common life events require you to check and possibly update your beneficiary forms — marriage, divorce, birth of a baby, death of a relative or job change.

Wm. Steve Wright is managing member of The Wright Legacy Group LLC.