We all have hopefully made explicit designations of beneficiaries for our life insurance policies, retirement accounts and even some investment accounts which provide for payment upon death without a court order. It’s important to remember that these designations take precedence over any provision in your Will. In other words, if your Will says that you give everything to your child, but your beneficiary designation gives your IRA (or life insurance or pension plan) to your cousin upon your death, your child is out of luck with respect to the IRA.
Normally, one should designate a “Primary Beneficiary or Beneficiaries” (the person(s) or organization(s) which will receive the proceeds at your death if he/she/it/they survive you), and also a “Contingent Beneficiary or Beneficiaries” (who will receive the proceeds if the Primary Beneficiary doesn’t survive you). A traditional example of this is naming one’s spouse as Primary and one’s children as Contingent Beneficiaries.
Unfortunately, we often forget to periodically review our operative beneficiary designations, even though we may review our other estate planning documents on occasion. But the common reason for revising one’s estate plan, i.e. changed life circumstances, represents an equally important time review our designations on our IRA’s, 401K’s, pension accounts, and life insurance policies. Our firm often finds that these designations have been neglected, even when our clients experience life-changing events, such as the death of a beneficiary, a divorce, the birth of a child, the maturing of a child or other beneficiary, changes in financial circumstances of a beneficiary or even family difficulties which would lead one to change one’s estate plan.
Case law in this area often depends upon the state in which the participant/insured was domiciled at death, but quite often the courts side with the express beneficiary on file with the insurance carrier or plan administrator, rather than the intended recipient, simply because the participant/insured failed to make the appropriate beneficiary designation change prior to death. In fact, the United States has ruled that an insurer or plan administrator may rely upon the beneficiary designation on file to pay out the proceeds of a policy or retirement account and, after such payment, will not be liable to any other party claiming to be the rightful recipient. With that in mind, we recommend that you periodically review these important designations.