Here’s Why Your Will May Fall Short of Your Intended Estate Plans
When it comes to estate planning, many people assume that the sole determinant of how their assets will be distributed once they pass away is their last will and testament. And although it is a reasonable assumption, it is important to recognize that a will, while an integral component of an estate plan, may not be enough to ensure the seamless transfer of assets to your intended beneficiaries.
One often overlooked yet critical aspect of estate planning is the significance of keeping beneficiary designations current. Failing to regularly review and update these designations can lead to undesirable consequences, with the potential to invalidate the entire plan.
Cancelation can happen because the beneficiary forms for retirement, life insurance, and some bank and brokerage accounts are treated as contractual agreements between you and the financial institution with which you have a relationship. In many cases, whether the accounts are opened through your employer or on your own, the information provided in the original application forms determines how assets are distributed.
This means that no matter what you may have verbally communicated to your loved ones, your assets could end up going to an ex-spouse, an estranged family member, or even expended by legal fees in a protracted court battle if your forms have not been updated. To prevent this from happening, it is recommended that you revisit and revise your beneficiary documents every few years.
It is important to habitually review and confirm that beneficiaries listed on all financial accounts are accurate and correctly reflect your intentions. Moreover, it creates an opportunity to initiate conversation with close family members about your wishes.
For many Americans, the bulk of their net worth lies within their workplace retirement account(s). This is another reason why good housekeeping regarding beneficiary designations is so crucial, as the rules regarding contested 401(k) accounts vary from state to state.
Under normal circumstances, married spouses are automatically entitled to each other’s 401(k) balances when the other predeceases them unless they formally waive their rights to it. However, if there is neither beneficiary listed on the account nor spouse involved, the employer and plan administrator will determine what happens.
Further, in cases where an unmarried person has not listed a beneficiary, the account will be inherited by their estate. Accordingly, the IRS and state government would be allowed to tax what would have otherwise been a tax-deferred asset. This also applies to traditional IRA, 401(k), 403(b), and other tax-deferred retirement accounts.
With respect to life insurance payouts, if no beneficiary is listed at the time of death, the insurance company holds the cards, and decisions in these instances tend to be subjective. Thereby, disputes over life insurance payouts (in many cases) tend to end up in court, which means that a portion of the assets go towards paying legal fees rather than to the intended recipients.
Failing to update your estate plan when major milestones occur is an easily avoidable mistake. Beneficiary designations are often an afterthought. They are appointed at the creation of the account or upon the completion of new hire documentation and seldom thought about again. If you get married, divorced, or have children, be sure to update the applicable forms as soon as you can.
Once you have requested the change(s), be sure to confirm they are complete and accurate. In some cases, you can review your account online to verify. In other cases, you will have to follow up with your financial institution and request written confirmation of any revisions.
When it comes to passing down your hard-earned assets to the next generation, it is important to take a belt and suspenders approach. It’s one thing to have a well-thought-out will that meticulously spells out your wishes but it is another to take the extra step to make sure that all other previously signed documents are perfectly aligned with your estate plan.
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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
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