John had worked hard to meticulously plan his estate, trying to ensure every detail was in place to provide for his loved ones. However, when he passed away, his family was shocked to discover that his company-sponsored retirement account still listed his ex-wife as the primary beneficiary. Despite his intentions, a significant portion of John’s assets went to someone he hadn’t spoken to in years, leaving his intended heirs in a difficult situation — and his final wishes unfulfilled.
Although this is a hypothetical scenario, it underscores the critical importance of keeping beneficiary designations up to date. It’s a crucial step that many overlook, and it can lead to unintended consequences and even legal complications.
What Is a Beneficiary?
A beneficiary is an individual or entity designated to receive assets from financial accounts such as retirement plans, life insurance policies and investment accounts upon your death. Naming beneficiaries ensures that your assets are distributed according to your wishes, bypassing the often lengthy and costly probate process where a court checks if a will is valid and oversees asset distribution. If there is no named beneficiary, the asset may pass to default beneficiaries dictated by the employer’s retirement plan document. Remember that it’s important to use the beneficiary’s full legal name, which may not be the name they informally go by and may change following a marriage or divorce.
What Could Go Wrong?
Having up-to-date beneficiary designations ensures that your assets go to the people you intend. Without current information, your assets might be distributed in ways that contradict your desires. For example, if you don’t update your beneficiaries after a divorce, your assets could end up with unintended recipients.
Failing to update beneficiary information can also lead to painful legal disputes among family members, delays in asset distribution, potentially costly probate proceedings or increased exposure to creditors. Moreover, the state might decide who gets your assets if no clear beneficiary is designated, which might not align with your intentions.
Contingent and Partial Beneficiaries
In addition to naming primary beneficiaries, it’s also important to designate contingent beneficiaries. This is the person or entity who will receive your assets if the primary beneficiary predeceases you or cannot be located. Naming a contingent ensures that your assets are still distributed according to your plans, even if the primary beneficiary cannot receive them. You may also be able to designate partial beneficiaries where, for example, two siblings each receive 50% of your retirement account assets. In some instances, you may have the option of designating a charity as a full or partial beneficiary.
Take a Proactive Approach
It’s advisable to review and update beneficiary designations regularly, particularly after significant life events. This could include a marriage, a divorce, the birth or adoption of a child or the passing of a previously designated beneficiary. Set regular reminders on your calendar to review beneficiary designations — at minimum annually. You might do this during your yearly meeting with a Financial Professional or on your employment anniversary to help ensure you remember it. If you’re unsure of how to review this information, you can ask your human resources representative or consult a Financial Professional.
A Small Investment in Time for Greater Peace of Mind
By staying proactive and reviewing your designations regularly — and following major life events — you can help prevent legal entanglements and align your estate planning with your intentions. Don’t leave your legacy to chance — keep it current and secure with updated beneficiary designations.
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