Many of us take a set-it-and-forget-it approach to beneficiary designations on retirement accounts, life insurance policies, wills, and trusts. We create the document, we choose a beneficiary, and we consider the work complete.
But the truth is, many life-changing moments are times to thoroughly review those beneficiary designations to make sure they’re up to date.
Here, Travis Huber, IRA Product Manager for Wells Fargo Advisors, lists four life events that should trigger beneficiary reviews. He also notes common mistakes to avoid.
When to review beneficiary designations
1. When you divorce or remarry. At these milestones, many people remember to update their wills, but they may forget about other accounts such as IRAs and life insurance policies. “You’ve got to rethink everything,” Huber says. “If you forget to update a document, the beneficiaries may not be your kids or new spouse as you prefer. Instead, your ex-spouse could wind up as the designee.”
2. When you have a child or a grandchild. The time that your family grows might be the time to consider making a child a beneficiary. You can do this individually within a policy or account, or you may want to consider using a trust. You should also revisit primary/secondary IRA beneficiary designations when a child becomes a legal adult, Huber says. If you want several children to split funds from your IRAs, make it clear in your designations. Legally, a sole beneficiary is not obligated to share funds with a family member you haven’t named as a beneficiary. Even if the beneficiary decides to do so, it could trigger a gift tax for the recipient.
3. When a beneficiary dies. Some individuals may outlive their beneficiary, whether it’s a spouse or a child. If, for example, a deceased person is named in your life insurance policy as a beneficiary, it could pose complications. “Even if you had named contingent beneficiaries, it’s still better to have the paperwork updated,” Huber says. “That will mean less time and effort to get those benefits to the right recipient.”
4. When beneficiaries’ financial needs change. As time passes, your beneficiaries‘ financial circumstances may evolve. Maybe you named your dependent children and your spouse equal beneficiaries on an IRA. Now those children are adults with successful careers; they no longer need the money as much as your spouse would. Make sure your beneficiary designations reflect those changing needs.
Two common mistakes to avoid
1. Conflicting designations. Huber sees this often, and it can make your intentions unclear. For example, perhaps you established an IRA when you were younger and named a sibling as a beneficiary. But years later, you created a will dividing your assets between your spouse and your children. However, beneficiary designations on IRAs and retirement plans supersede what’s stated in a will or trust, Huber says. “Your spouse and children can try to use their interest in the will or trust to gain IRA assets; however, the actual IRA designated beneficiary will likely remain in control of the inherited IRA assets.”
2. Incomplete designations. “Sometimes you put your wishes on paper, but maybe you didn’t sign the paper, or you forgot to submit it,” Huber says. “This would likely create confusion, perhaps cause challenges and delay or prevent passing the assets to the person you want to receive these funds”
Finally, whenever you review, take a holistic approach to beneficiary designations—reviewing all of your accounts together, instead of one at a time—because there can be a ripple effect. “If you change one, it might change what you want to do with the others,” Huber says.