By AnnaMarie Mock, CFP®
As a financial advisor, one of my most important recommendations to my clients is to review and update their beneficiary designations regularly. Life changes and your estate plan should evolve to reflect your current wishes and circumstances. Failing to update beneficiaries on retirement accounts, insurance policies, and wills can lead to unintended consequences, potentially leaving your loved ones in a difficult situation.
The Importance of Keeping Beneficiaries Up to Date
Beneficiary designations dictate who will receive assets from your financial accounts upon passing. These designations override your will, meaning even if your estate planning documents are updated, outdated beneficiary information can still lead to assets going to unintended recipients. Ensuring your beneficiaries are up to date is critical in maintaining control over your financial legacy and providing for those you care about.
A notable court case highlighting the consequences of failing to update beneficiary designations is Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (2009). In this case, William Kennedy participated in DuPont’s employee retirement plan and named his wife, Liv, the sole beneficiary. After their divorce, the decree stated that Liv waived her rights to William’s retirement benefits. However, William never updated the beneficiary designation on his DuPont retirement plan to remove his ex-wife.
When William passed away, DuPont followed the beneficiary designation on file and paid the retirement plan proceeds to Liv despite the divorce decree stating she had waived her claim. William’s estate sued, arguing that the divorce decree should override the outdated beneficiary designation. The U.S. Supreme Court ruled in favor of DuPont, affirming that ERISA-governed retirement plans must distribute benefits according to the named beneficiary, regardless of external divorce agreements. This case illustrates the importance of actively updating beneficiary designations, as legal documents such as wills or divorce decrees may not override them.
This oversight can happen with life insurance policies, bank accounts, and retirement plans, leading to unintended consequences and unnecessary stress for loved ones. Regularly reviewing and updating beneficiary designations ensures that assets go to the intended recipients and align with your estate plan.
Key Life Events That Require a Beneficiary Review
Life is full of changes, and many of these changes should prompt a review of your beneficiary designations. If you get married or divorced, it is crucial to review your beneficiary designations to ensure they reflect your current relationship. If desired, a new spouse should be added, while an ex-spouse should be removed if no longer the intended recipient. The birth or adoption of a child may prompt you to update your estate plan to include them as a beneficiary. If a listed beneficiary passes away, you should update your designations to prevent legal disputes and ensure your assets are allocated according to your wishes.
Estate planning strategy adjustments may be required due to changes in financial circumstances, such as receiving an inheritance or experiencing a significant financial shift. Over time, relationships evolve, and your estate plan should reflect your current priorities and closest relationships. If you’ve created a trust or restructured your estate plan, beneficiary designations should be adjusted to align with these changes.
Where to Check Your Beneficiaries
Several key financial accounts and policies require beneficiary designations.
Retirement accounts such as 401(k)s, IRAs, and pension plans pass directly to named beneficiaries, bypassing probate.
Life insurance policies should be reviewed to ensure the right person receives benefits without unnecessary delays or disputes.
Brokerage accounts with transfer-on-death (TOD) designations and bank accounts with payable-on-death (POD) instructions should be reviewed to prevent funds from being tied up in legal processes.
While beneficiary designations often override wills, ensuring that your will and trust documents are aligned with your overall estate plan to prevent contradictions and confusion is essential.
Common Mistakes to Avoid
When updating beneficiaries, it is essential to avoid common pitfalls.
One mistake is failing to name contingent beneficiaries. If your primary beneficiary predeceases you and no contingent is listed, assets could go through probate, delaying distribution.
Beneficiary designations should align with your broader estate planning strategy to prevent inconsistencies.
Some retirement plans require spousal consent to name someone other than a spouse as a beneficiary, so review your plan’s rules.
It is crucial to regularly update your designations after significant life changes to ensure they reflect your current intentions and circumstances.
Steps to Take Today
If you haven’t reviewed your beneficiary designations recently, now is the time to act. Start by gathering all relevant documents, including financial accounts, insurance policies, and estate planning documents. Review your current beneficiaries to confirm the right individuals or entities are listed. If updates are needed, work with your financial advisor, attorney, or plan administrator to make changes. Communicate with your loved ones to ensure they know their role and any specific wishes you have. Finally, regularly review your beneficiary designations, especially after significant life events. At HIGHALAND, we make it a priority to review beneficiary designations periodically and proactively during life events.
Final Thoughts
Your estate plan is an essential part of securing your financial legacy. By proactively reviewing and updating your beneficiary designations, you can prevent unintended consequences, avoid legal hurdles, and provide for your loved ones according to your wishes. Take the time today to review your beneficiaries and ensure your estate plan aligns with your current life situation. If you need guidance, working with a financial advisor can help ensure every aspect of your estate plan is structured correctly and up to date.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.