Update names of beneficiaries to protect assets

By Anne Mitchel
The (Fort Myers, Fla.) News-Press

Marriage. The birth of a child. Retirement. Divorce. Death. Life changes happen all the time, just like the seasons.

Any of these life events could mean that your beneficiary designations — naming the people who will inherit your pension, life insurance, etc. — are no longer up to date.

And that could create a big headache for your heirs some day, according to the National Endowment for Financial Education.

"These assets are sometimes referred to as 'nonprobate' assets because they typically go to the beneficiary automatically, rather than ... passing to the heirs through a will," said William L. Anthes, president and CEO of the national endowment. "In the event of your death, these forms actually override your will."

The Colorado-based endowment is a nonprofit foundation whose mission is to educate Americans about personal finance. Many individuals don't realize the significance of beneficiary designations, Anthes says.

David Platt, an attorney with Henderson, Franklin, Starnes & Holt in Fort Myers, Fla., said people name beneficiaries and then forget about them all the time.

"Things don't always get where they should have gotten or where the person wanted them to go," he said.

Platt recommends at least every five years "taking inventory of your estate planning documents, beneficiaries, wills, power of attorney.

"If you have a power of attorney naming someone who is (deceased), you don't have a power of attorney," he noted.

Ways to update names

• Beneficiary designations are easily changed in most but not all cases.

  Typically, all you have to do is fill out a new form and sign it. However, if your divorce decree stipulates that your ex-wife must be the beneficiary of your life insurance policy, you cannot change that.

  Or if you took out life insurance as collateral for a loan and named the lender as the beneficiary, the lender may require that you not change the beneficiary designation until the loan is paid.

• Children under 18 or 21 (depending on the state) cannot be named as beneficiaries of a life insurance policy, retirement plan or annuity. However, you can name a guardian to receive the assets for the child's benefit, or set up a trust for the child and name the trust as beneficiary.

  After the child reaches adulthood, you can revoke the trust, if the terms of the trust allow it, and change the beneficiary designation to your child's name.

• Expect to name both a primary and a contingent beneficiary. The primary beneficiary is your first choice; the contingent will receive the asset if the primary beneficiary is no longer living when you die.

• Consider tax implications when naming a beneficiary. For example, the beneficiary of an IRA must pay income taxes on the proceeds, and estate tax may be due as well.

  Some retirement plans allow the beneficiary to withdraw the proceeds over his or her lifetime.

  To avoid income and estate taxes, name the spouse as beneficiary. The spouse can roll over the retirement plan to his or her IRA without having to pay income taxes. However, your adult children cannot roll over your retirement plan to their IRAs.

• If you don't name a beneficiary, the asset will go into your estate.

• If the beneficiary you named has died, state law will determine who receives the asset. The presumption is that the heirs named in your will should receive the proceeds, but that could be challenged.

  For example, if you name your best friend as the beneficiary, forget to change the designation when the friend dies, and you later die, your friend's spouse or children could claim the asset.

• While you are updating these forms, look at other critical but often forgotten documents like your power of attorney, health care proxy and the co-signer form for your safe deposit box.

Source: National Endowment for Financial Education