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Think You’ve Made the Right Designation? Think Again.

Originally Published by The Charlotte Business Journal on September 16, 2016.

By Woody Connette

The batteries in our home smoke alarms are life savers, yet we tend to overlook them, often for years on end. Sadly, there’s no turning back the clock if they fail at a critical moment. The same is true with the beneficiary designations we make with our life insurance, IRA and retirement accounts. We never think of them until it’s too late, and the wrong person collects the hard-earned wealth we intended for someone else.

Assuring that your life insurance company, benefit administrator or investment manager has a properly signed designation of beneficiary form is the simplest, most basic of all estate planning tools. Retirement funds and life insurance are the primary assets that most of us hold, aside from our personal homes. Many “payable on death” investment and bank account assets also may be distributed to a named beneficiary under the terms of various account agreements. As a result, those simple little beneficiary designation forms control the distribution of our assets to a far greater degree than our wills, in many cases.  The most carefully crafted will or estate plan can be torpedoed by an outdated designation of beneficiary.

Imagine this: Dick and Cindy were soul mates in the seventies and enjoyed the early years of their starter marriage. But as Cindy got more serious about her life’s course, Dick continued to follow the music. They grew apart and divorced. Cindy remarried, had three children and a successful career. Thirty-five years after divorcing Dick, she dies suddenly. Her primary asset is a tiny IRA account she opened while married to Dick, which has grown from contributions and appreciation to more than a million dollars. The account had been so small in the beginning that Cindy forgot she had named Dick as the beneficiary.

Who gets the money? Her husband of thirty-plus years, or Dick, who’s wasted in Margaritaville? I’m a trial lawyer, and I have faced these questions from survivors too often. In most cases, Dick gets the jackpot. “How could that be?” you ask.  “Dick is ancient history.  They were divorced!”  In most states, including North Carolina, statutes bar Dick from inheriting the estate of his ex-spouse. But those laws apply only to estate assets.  Estate planners will tell you that life insurance, IRA and retirement accounts are “non-probate assets,” meaning they pass directly to a named beneficiary “outside” the estate. Except for the rare instance where the Dicks of the world have executed a separation agreement specifically revoking any claim to the proceeds, or where a divorce decree has barred his claim, the simple, one-page designation of beneficiary form controls the distribution.

Had Cindy’s retirement money been held in an employer’s 401(k) account, or if she had life insurance through her job, Dick still would have gotten the cash if he was still named as beneficiary.  Most employers’ group retirement and benefit plans are governed by a federal law, ERISA, which trumps all other state laws that might affect benefit distributions. The U.S. Supreme Court has said there’s no need for a retirement plan administrator to delve into the personal history of beneficiaries to do a post mortem on their true intent. The designation of beneficiary form, whether fair or foul, is the controlling document.

Just like those smoke detector batteries, it’s important to check your beneficiary designations regularly for all life insurance, IRA, retirement, investment and bank accounts. Here are some simple rules that could save your loved ones a lifetime of heartache:

  1. Check your designation of beneficiaries annually. When those 1099 forms start arriving in February, use that as your trigger for your annual check-up.
  2. If you are separating from a spouse or long-time partner, check the designations, and make certain the benefits are addressed in any separation agreement.
  3. Following the death of a spouse, child or any other beneficiary, review your designations.

These are the basics. It’s always wise to review your overall financial picture with a good financial planner or tax advisor, to make certain your distribution of these non-probate assets fits well with your overall estate plan. Your loved ones will benefit from this front-end vigilance far better than having to pay a visit to me on the back end, when it may be too late to repair the damage.

Attorney Edward (Woody) Connette  specializes in cases involving ERISA and long-term disability, catastrophic personal injury, wrongful death, and denial of health benefits.