November 12, 2015 Writtten by: Jim Eutsler. Financial and retirement planning advisor
The idea of one’s own death is not a point we typically like to ponder. We are routinely told to stay positive, and death doesn’t really fit well with that idea. However, there is a reason that the US insurance industry’s net premiums written for life insurance totaled over $600 billion last year – many people follow the Boy Scout’s motto, “Be Prepared”. Just as life insurance is earmarking funds for a future (hopefully very future) date, the same is done with retirement funds. And both retirement funds and life insurance policies have a common denominator – a beneficiary.
So what is a beneficiary?
Technically speaking, it is a person who derives some form of advantage for something, typically spoken in reference to trusts, wills, retirement accounts, or life insurance policies. I’m going to specifically address retirement accounts.
If you are married, most retirement accounts will default to your spouse being the primary beneficiary, regardless of whether you proactively designated them as a beneficiary. By far the easiest solution to ensure this, however, is to complete a beneficiary designation form. Sometimes these are considered ‘TOD’ forms or ‘Transfer On Death’ when dealing with a taxable account. It is important to remember to do this for every account you have. If you have a PST account, a brokerage account, an IRA and a 401(k) all at the same institution, each should have an assigned beneficiary.
A contingent beneficiary designation is something you should also consider. If you and your primary beneficiary (let’s assume your spouse) were to die at the same time (for example, in a plane crash), the asset/account now goes to the contingent beneficiary, which can often be selected on a percentage basis such as 50% to one child and 50% to the other or simply 100% to your trust.
The beneficiary documentation, like a trust or will, should be updated periodically if the situation calls for it, for example:
- A divorce
- Death of previous mentioned beneficiary
- Birth of a child
For example, Procter & Gamble recently changed retirement plan sponsors from Empower to Aon Hewitt. As part of the transfer, Aon Hewitt did not receive, nor will they receive, the beneficiary forms from Empower. Now, does that mean you are not covered if you were to die? Not necessarily. Aon Hewitt would reach out to P&G and look to get whatever forms P&G has on file. Given this can take time and multiple ‘cooks are in the kitchen’, the easiest approach by far would be to call Aon Hewitt (1-844-786-6588) and request the change.
One important aspect to remember
A designated beneficiary form, or transfer on death (TOD), is contract law, and contract law trumps a will. That said, if you note in your will to leave all of your worldly possessions to your current spouse, however, you forgot to change your beneficiary on your 401(k) plan at work which still states your ex-spouse, that 401(k) is going to your ex-spouse. Do not make that mistake.
So what if you don’t want to mess with it all?
Well, as with everything in life, there are consequences. The foremost being that the funds in the accounts will go to your estate and then proceed through a probate court. Simply speaking, a probate court attests to the validity of a will and decides who will receive the deceased person’s property. It is also public record and can take up to a year to process. So, if you would like for your retirement assets to go to the individual you choose, remain private, and transfer in a relatively expeditious fashion, you need to ensure your beneficiary designation forms are up to date.
Content in this article is not intended to be financial advice. Instead, we think of it as educational, and financial education is important to us.
Cincinnati Wealth Management and Retirement Planning Firm. Hengehold Capital Management.