Estate planning attorneys learned an important lesson in the 2001 case, Egelhoff vs. Egelhoff, 532 U.S. 141 (2001). A man designated his wife as his beneficiary of his pension plan, provided by his employer, and made her the beneficiary of his life insurance policy provided by his employer. The couple later divorced and the man did not immediately remove her as the beneficiary of either then pension plan or his life insurance. Just weeks after the divorce, the man was killed in an accident. The man’s children from a previous marriage filed a suit against the ex-wife for the benefits. In the end, the Supreme Court ruled that the appointed beneficiary took precedence over the state law that could have disinherited the ex-wife. The take away from this case is clear, do not delay in changing your beneficiaries.
When completing your estate plan, your attorney will guide you through designating a beneficiary. A beneficiary is the person or entity that will obtain the proceeds from life insurance policies, retirement accounts or estates, upon death. Your beneficiary can be anyone, from your children, to an organization of your choice, or the trustee of your living trust. Generally beneficiary designations take precedence over gifts made in wills or trusts. This is why it is so important to keep your beneficiary information up to date on each account and policy. The asset that passes by beneficiary designation will generally pass directly to the beneficiaries without probate. However, if you did not complete a beneficiary designation, the asset that could have avoided probate may end up in your probate estate causing expense and delays in transfer. Minors cannot own property so a beneficiary designation for a minor may be problematic, and other solutions must be discussed.
Attorneys recommend setting up a system with your attorney to review your policies, and the beneficiary named, on a regular basis. This is will keep your financial accounts in order, and will ensure that the proper people will benefit, as you see fit. Having a simple system in place, for example, a yearly appointment to review your policy details, is the best way to keep your loved ones taken care.
While having a system in place is the best way to ensure routine maintenance, there are some other factors that should trigger a review of what you may have in place, and possibly prompt an update. If you experience a life event such as marriage, divorce, or a birth or death in a family, that could drastically change the named beneficiary on a particular policy. When you update your estate planning, receive a beneficiary verification notice or roll over a 401 (k) or IRA, that is a great time to verify that you have your beneficiaries properly named.
Life can change so quickly. Correctly designating beneficiaries is so important, as they control a large portion of your wealth. Often when people set up their policies early in their life, they forget about the importance of changing their designations and much changes over the course of their life. This often results in mistakes and can cause loved ones hurt and costly court battles. The best way to avoid these mistakes is to work with an attorney to set up a review system, and also be aware of when you should re-evaluate your designations.