My husband just recently opened a new account at one of those online, do-it-yourself, investment companies. He promises that with the tiny amount of money I was willing to allow him to experiment with that he will make us tons of money. After he got the account set up, he asked me to sit beside him so he could show me what he had done. As he was showing me the fancy website and all of the different gadgets and graphs showing how our money was invested – I asked the simple question “how is this account titled?” My husband, who has an engineering degree and is one of the most intelligent people I know, turned to me and said “I dunno?”
Oftentimes when a new account is created, no matter the type of account or the financial institution, the account title and beneficiary designations get lost in the shuffle. The online investment company simply had a blank that said “Name” – it did not ask whether he wanted to include another account holder or list a beneficiary on the account. (In fact, upon searching I was unable to even find a place on the website where you could add an account holder.) Other times you might get a beneficiary designation form on the account right away, and not even remember that you filled it out. For example, when you first get life insurance or start a new job, the financial advisor or employer often provides you with the beneficiary form along with all of the other documentation. If you started that job or applied for life insurance 20 years ago – those beneficiary designations may be 20 years old. I sometimes can’t even remember what I had for dinner last night, let alone who I decided 20 years ago should get my 401K if I pass away!
So – why are account titles and beneficiary designations so important in estate planning? If you hold an account in your individual name (without a joint owner) and you pass away, the financial institution looks to the beneficiary designation for who should receive that account when you pass away. “But,haw” my husband asks, “didn’t we do that fancy estate plan that says you will get everything when I die?” Beneficiary designations supersede what a Will or Trust might say. This is extremely important in estate planning because you might update your estate plan, but never update your beneficiary designations. If you do have an estate plan, you want to make sure that your beneficiary designations coincide with that plan. If you want assets to go into trust for your kids, for example, listing your kids as a beneficiary on your 401K means that they will get that asset outright, free of trust.
We see cases all of the time where either there is no beneficiary designation or an old beneficiary designation was never updated. Ex-spouses, deceased individuals, and disabled beneficiaries are common mistakes we see. Crafting an estate plan – such as listing a trust as a beneficiary – can resolve most of these problems. When you go to an initial estate planning meeting with an attorney, be sure to discuss all of your assets and look up the beneficiary designations ahead of time. A well-versed estate planning attorney can tell you how to properly designate beneficiaries to align with your goals.