Updating Your Beneficiaries: Why It’s So Important
November 30, 2020
According to estate planning professionals across the country, the COVID-19 crisis has inspired many people to create Wills, or update their Wills if they already had one in place. Despite the fact that no one really wants to think about death, this is good news. Dying without a will (intestate) can cause myriad expensive and stressful complications for your surviving loved ones because the laws of the state where you reside will determine how your property is distributed upon your death.
Don’t Overlook Your Other Assets
Remember: the beneficiary designations you put in place for assets like life insurance, IRAs, retirement plans, and commercial annuities take precedence over any other form of legal documentation, including your Will. It doesn’t matter which document is more recent; a beneficiary form will always hold authority, making it incredibly important to not only establish beneficiary designations, but to review them regularly.
Like your Will, your beneficiary designations should be updated based on life events, including births, deaths, marriages, divorces, or other changes in family dynamics, as well as name/address changes for your loved ones. Failing to update these designations can result in your assets being distributed to someone you didn’t intend to receive them.
Here’s an example: Tom Smith had been married three times. During his second marriage, he signed up for a $500,000 life insurance policy and listed his then-wife, Ann Smith, as the sole beneficiary of the policy. Some years later, he divorced and remarried again. Then Tom died suddenly in an auto accident at the age of 63. Among the assets he left behind was the life insurance policy. Unfortunately, Tom had neglected to update his beneficiary designation on the policy and his ex-wife, Ann, filed for—and received—the proceeds, despite the fact that she had been divorced from Tom for more than ten years and had even remarried herself.
Other Beneficiary Options
You may also choose to name a qualified charity, like Drexel University, as a full or partial beneficiary of retirement assets or a life insurance policy. When naming an organization, be sure to enter its complete name, which may be different from the version by which it is commonly known. Several different organizations may use similar names—and you want to be sure your bequest goes to the one you have in mind.
Here’s a tip: naming a qualified charity as beneficiary of your retirement assets is a tax-smart move. Any individuals named as beneficiaries of the retirement account (other than your spouse) may have to pay income taxes on any distributions they receive. But because qualified charities are tax-exempt and won’t owe taxes on the withdrawal.
In the case of beneficiary designations, it's always the employee or investment holder who is responsible for updating them. Make it a habit to check all your estate planning documents every three to four years, including your beneficiary designations. If you are unsure how to do it, contact your employer’s human resources department or your financial institution for help.
Questions? Contact David Toll, senior associate vice president, Office of Gift Planning, at (215) 895-1882 or email@example.com.