When you sign up for life insurance, a 401(k) or any other retirement plan, you are given the opportunity to list one or more beneficiaries to receive the proceeds should you pass away. Frequently people fill out the form and then put it out of mind, sometimes even forgetting which beneficiary is on which account. An even more common situation is being signed up for retirement and death benefits with your first job. Twenty-three years old, unmarried with no children, most people will name parents and siblings as their beneficiaries. Fast forward to age forty, now married with two teenage children and a home. Have the beneficiary designations been brought up to date?
Similarly, you can add a pay-on-death (POD) or transfer-on death (TOD) designation to a bank or non-retirement investment account, directing who will immediately become owner of the account on your death.
Many people believe that a will or the laws of intestacy (who inherits if you have no will) will take care of the matter. Not so; beneficiary designations trump the terms of your will! Accounts that pass by beneficiary designation are not even part of the estate to be distributed according to the terms of a Will. They pass directly to the individual listed as the primary or contingent beneficiary.
It is very important to review beneficiary designations in contemplation of or just after a major life change, such as marriage, divorce, death, birth of a child, etc. It is also important to check your beneficiary designations from time to time to make sure they are what you want them to be. Many investment companies, but not all, send an annual statement to remind who has been listed as the beneficiaries. You should check all of your estate planning documents every few years and do the same with beneficiary designations.
The legal impact of divorce is an example of why beneficiary designations should be updated after a major life event. In Virginia, when a couple divorces, the law treats the surviving ex-spouse as having predeceased the decedent. Any revocable beneficiary designation on a life insurance policy, annuity, retirement plan or POD/TOD account that names the ex-spouse as beneficiary is revoked by the divorce. When the law prevents a death benefit from passing to an ex-spouse, the death benefit is paid as though the ex-spouse had predeceased the decedent. A notable exception to the Virginia law happens when the retirement plan or federal government life insurance is governed by federal employment law which preempts state law. Click here for more details of this important exception.
