Many individuals assume that estate planning is only a concern for the very wealthy, considering today’s relatively generous $5.34 million federal estate tax exemption. But regardless of your income or net worth, everyone should periodically check the beneficiary designations for life insurance policies, bank accounts, brokerage firm accounts, retirement accounts, and other assets. Failing to turn in the proper forms to designate beneficiaries or allowing your forms to become out-of-date, can lead to serious financial headaches down the road.

Beneficiary Review Checklist

You should be certain to fill out and turn in beneficiary designation forms and include secondary beneficiaries for the following assets:

  • Life insurance policies, annuities, IRAs, and other tax-favored retirement accounts and employer-sponsored benefit plans.
  • Bank and brokerage firm accounts, specifically transfer on death (TOD) or payable on death (POD) beneficiaries
  • 529 college saving accounts

The consequences of failing to take these simple steps can be serious, resulting in real-life horror stories like the one experienced by John Wayne Hunter of Marshall, Texas. Hunter retired from Marathon Oil Company, where he was a participant in the company’s pension plan. He had designated his wife as the primary beneficiary, but failed to designate any secondary (contingent) beneficiary. After his wife died, he did not update the designated primary beneficiary. When Hunter died in 2005, the plan administrator considered — and rejected — the possibility that Hunter’s two stepsons might qualify as “children” who would therefore be entitled to all of Hunter’s benefits. Instead, the plan administrator distributed the benefits, which totaled more than $300,000, to Hunter’s six siblings. The stepsons sued, and after several rounds of court proceedings and appeals, the Fifth Circuit ruled against them. To avoid leaving your surviving family members to deal with catastrophes like this, follow these estate planning best practices:

  • Revisit Beneficiaries as Life Events Unfold. After major life events like marriage, divorce or even personal situations like a “falling out” with a sibling or child, review your designated beneficiaries. You may also want to consider the life events of your children. For example, you might want to leave more of your life insurance benefits to a child who just had quadruplets and less to your childless heirs.
  • Keep in Mind Special Circumstances if You’re Married. If you’re married and have set up accounts naming you and your spouse as joint owners with right of survivorship, the surviving spouse will automatically take over sole ownership when the first spouse dies. You may want to name a secondary beneficiary to cover the possibility that you both die at the same time.
  • Submit Beneficiary Forms to Avoid Probate. Another advantage of designating individual beneficiaries is avoiding probate, because the money goes directly to the named beneficiaries by “operation of law.” In contrast, if you do not name a beneficiary, your estate must go through the potentially time consuming and expensive process of court-supervised probate.

For more information on estate laws and planning, register for our upcoming Client Seminar with Vaughan, Fincher & Sotelo PC, A Review of the Current Estate Tax Laws and How They Affect Your Estate Plan.

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