Do you want to create absolute chaos or extensive problems and expenses for your heirs? Sure, you do. Not!
When we ask clients and their advisors whether client's beneficiary designations are current, we either get a “sure” answer or an “I think so?” response. Not good.
What's a simple way you can ensure that your inheritance passes to your designees in accordance with your wishes? Make sure your beneficiary designations are up to date! Most people fill out a form when they open an account and never think about it again. Except. Things change: people get married, divorced, have children, want to disinherit someone. All kinds of things can happen.
“But I have a will!”
Not all of your property is distributed by your Will or Trust. Many assets are passed on through a beneficiary designation, for example retirement accounts (IRA, DEP or 401(k), etc.), life insurance policies, annuities, employee benefit plans and stock options to name a few. These types of accounts will ask you to name a beneficiary when you open them. In other words, it is your responsibility to select the person(s) you want to inherit those assets. Your will or trust for that matter has no relevance here. Accounts with beneficiaries are not probate assets so your will does not control where they end up.
Clearly, you should periodically review your beneficiary designations to make sure they reflect your wishes. Additionally, when you designate a beneficiary, make sure the name is accurate. The insurance company will not release funds to “The John and Jane Doe Revocable Trust” if the name on the beneficiary form is “The Doe Family Trust”.
Even when our clients have beneficiary designations in place they are often outdated or fail to take into account what the beneficiary's position is. Are they children? Does the person have special needs? What happens if there is more than one beneficiary and one dies – where does the benefit go?
What if your spouse dies and they have named someone else as beneficiary of their IRA or insurance policy? In some states such a designation, without the consent of the other spouse, is void as a fraud upon the spouse's rights. But in Arizona a spouse has the right to dispose of his or her half of the community property as they see fit. In the case of an insurance policy or retirement account that designates a beneficiary other than the spouse, Arizona law presumes that the excluded spouse consented to the designation but the spouse is still entitled to their one-half share of the community property whether it comes from the insurance policy or other assets. If those other assets are less than the spouse's share, the spouse may have a claim against the policy.
What if you named your spouse as a beneficiary, but then you later divorce? Well in that case, the Arizona Legislature has got your back! In 1996 they passed a statute that automatically revokes any disposition of property made by a divorced person to their former spouse or to a relative of the former spouse. In Estate of Lamarella, the ex-wife argued that her deceased ex didn't change the beneficiary designation after their divorce because he wanted her to receive the proceeds of his life insurance policy. The Court of Appeals said “too bad” because the statue applies, and if he wanted his ex to remain on the policy, he should have redesignated her as beneficiary. Any time you have a life changing event, such as a death, a birth or a divorce, you may want to change your beneficiary designations.
Ah, but what if the retirement account plan (ERISA) beneficiary designation is not changed after the divorce? Arizona law suggests that the account be treated the same way as the life insurance policy. But ERISA is a federal law that should preempt state law. As least for now Arizona's “revocation upon divorce” law applies. The divorced spouse is treated as if that spouse died first. This is not the rule in every state however.
Beneficiary designations are an important part of estate planning. Why leave this piece unattended? It is much better to review your status on a regular basis on your own or with your financial professional. We review these items as part of every estate plan we do.