The Importance of Reviewing/Updating a Will and Account Beneficiary Designations

In his mid-twenties, Gary married a waitress named Tiffany. The marriage lasted only a couple of years, and then Gary went on to marry Jill, had two children – Caroline and Sarah – and became a partner at his architectural firm. At age 50, Gary passed away suddenly from heart failure while running a half marathon. Sarah was a junior in college and Caroline had moved back home after graduation while looking for a “real” job.

While Jill had a lot on her plate as a new widow, she wasn’t worried financially because she and Gary had updated their wills just a year before. But what she learned next was devastating. Although Gary named Jill sole beneficiary in his will, he had never changed the beneficiary designation for his work 401(k) plan or life insurance policy since he’d started at his firm 25 years earlier. That meant that his ex-wife Tiffany, now thrice divorced and living in a trailer park, would receive the majority of the family’s assets.

This sounds like a one-in-a-million situation, but the fact is it represents one of the biggest mistakes people make in estate planning. It happens because people’s lives tend to grow richer and more complex as they get older. They switch jobs, buy homes, divorce and remarry, have children and stepchildren, adopt at a late age, and are completely swept away by a life filled with neighborhood barbecues, weekend youth soccer games and trying to make ends meet. Administrative chores like changing beneficiary designations on old accounts is one of those little details that is often overlooked.

A financial advisor might not ask about assets he does not manage, such as life insurance policies or a company 401(k) plan. As such, there might not be anyone reminding you to update account beneficiary designations for your employer retirement plan, IRA, annuity, insurance policy or even bank accounts.

Be aware that a will does not supersede the beneficiary instructions of these separate accounts; therefore, it’s important to review and update your beneficiary designations every so often for each of your accounts – and always whenever one of the following scenarios occur:

• Marriage
• Divorce
• Remarriage
• Job change
• Retirement plan rollover
• Birth of a child or grandchild
• Adoption of a child or grandchild
• Beneficiary dies or becomes disabled
• One of the your financial institutions changes ownership

One common scenario is that of two separate families joining via a second marriage. If stepparents and stepchildren aren’t confusing enough, imagine the new couple decides to have a baby together who is much younger. The younger sibling may be resented by and not likely to have a strong relationship the older siblings, and yet, she could end up at their financial mercy if she is left out of the will and/or beneficiary designations.

The moral of this story is that writing a will is important to appoint a guardian for your under-age children, an executor for your estate and to communicate your desires. However, a will is not the last word on asset transfers, so it’s just as important to keep your account beneficiary designations up-to-date and consistent with your will.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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