Be careful when naming beneficiaries
Edward Jones - Chad Choate, AAMS
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Apr 18, 2024
Florida - Sarasota, Bradenton & Charlotte Counties
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You might not have thought much about
beneficiary designations — but they can play a big role in your estate
planning.
When
you purchase insurance policies and open investment accounts, such as your IRA,
you’ll be asked to name a beneficiary, and, in some cases, more than one. This
might seem easy, especially if you have a spouse and children, but if you
experience a major life event, such as a divorce or a death in the family, you
may need to make some changes — because beneficiary designations carry a lot of
weight under the law.
In
fact, these designations can supersede the instructions you may have written in
your will or living trust, so everyone in your family should know who is expected
to get which assets. One significant benefit of having proper beneficiary
designations in place is that they may enable beneficiaries to avoid the
time-consuming — and possibly expensive — probate process.
The
beneficiary issue can become complex because not everyone reacts the same way
to events such as divorce — some people want their ex-spouses to still receive
assets while others don’t. Furthermore, not all the states have the same rules about
how beneficiary designations are treated after a divorce. And some financial
assets are treated differently than others.
Here’s
the big picture: If you’ve named your spouse as a beneficiary of an IRA, bank
or brokerage account, insurance policy, will or trust, this beneficiary
designation will automatically be revoked upon divorce in about half the
states. So, if you still want your ex-spouse to get these assets, you will need
to name them as a non-spouse beneficiary after the divorce. But if you’ve named
your spouse as beneficiary for a 401(k) plan or pension, the designation will
remain intact until and unless you change it, regardless of where you live.
However,
in community property states, couples are generally required to split equally
all assets they acquired during their marriage. When couples divorce, the
community property laws require they split their assets 50/50, but only those
assets they obtained while they lived in that state. If you were to stay in the
same community property state throughout your marriage and divorce, the ownership
issue is generally straightforward, but if you were to move to or from one of
these states, it might change the joint ownership picture.
Thus
far, we’ve only talked about beneficiary designation issues surrounding
divorce. But if an ex-spouse — or any beneficiary — passes away, the assets
will generally pass to a contingent beneficiary — which is why it’s important
that you name one at the same time you designate the primary beneficiary. Also,
it may be appropriate to name a special needs trust as beneficiary for a family
member who has special needs or becomes disabled. If this individual were to be
the direct beneficiary, any assets passing directly into their hands could
affect their eligibility for certain programs.
You
may need to work with a legal professional to sort out beneficiary designation
issues and the rules that apply in your state. But you may also want to do a
beneficiary review with your financial advisor whenever you experience a major
life event, such as a marriage, divorce or the addition of a new child. Your
investments, retirement accounts and life insurance proceeds are valuable
assets — and you want them to go where you intended.
Chad Choate III, AAMS
828 3rd Avenue West
Bradenton, FL
34205
This article was
written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member
SIPC
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