My husband just opened a new account at one of those online do-it-yourself investment companies. He promises that with the small amount of money I was willing to allow him to experiment with, he will bring us tons of money. After creating the account, he asked me to sit next to him so he could show me what he had done. As he showed me the fancy website and all the different gimmicks and charts showing how our money was being invested, I asked the simple question “what is this account titled?” My husband, who has an engineering degree and is one of the smartest people I know, turned to me and said, “I don’t know?”
Often when a new account is created, regardless of account type or financial institution, the account title and beneficiary designations get lost in disarray. The online investment company just had a blank that said “Name” – it didn’t ask if he wanted to include another account holder or list a beneficiary on the account. (In fact, when researching, I couldn’t 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, without even remembering that you filled it out. For example, when you take out life insurance for the first time or start a new job, the financial advisor or employer often provides you with the beneficiary form along with all the other documents. If you started this job or applied for life insurance 20 years ago, those beneficiary designations may be 20 years old. Sometimes I can’t even remember what I had for dinner last night, let alone who I decided 20 years ago to get my 401K if I died!
So why are account titles and beneficiary designations so important in estate planning? If you have an account in your name (without a co-owner) and you die, the financial institution turns to the beneficiary designation to find out who should receive this account when you die. “But, haw” my husband asks, “didn’t we do this fancy estate plan that says you’ll get everything when I die?” Beneficiary designations supersede what a will or trust may indicate. This is extremely important in estate planning because you can update your estate plan, but never update your beneficiary designations. If you have an estate plan, you want to make sure your beneficiary designations coincide with that plan. If you want the assets to be placed in trust for your children, for example, listing your children as beneficiaries on your 401K means that they will get that asset outright, without any trust.
We see cases all the time where either there is no beneficiary designation or an old beneficiary designation has never been updated. Ex-spouses, deceased persons and disabled beneficiaries are common errors we see. Developing an estate plan – such as listing a trust as the beneficiary – can solve 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 research beneficiary designations in advance. An experienced estate planning attorney can tell you how to properly designate beneficiaries based on your goals.