I want to tell you a story about how a woman’s simple negligence cost her kids nearly $500,000. After 30 years of marriage, a woman I will call Mary Smith found herself in a failing marriage that was heading for divorce court.
Her only major financial asset was a rollover IRA that had started as a 401(k) account shortly after she graduated from college and started a career in sales. As she advanced, she was able to put more and more money into the account; by the time of her impending divorce, her IRA was worth about $500,000.
As she contemplated her divorce, she was fairly confident that she’d walk away with at least her IRA. Her two children, Sarah and James, had recently graduated from medical school; each of them had substantial student loans. Mary told them she would help with the loans by using some of her IRA to pay down their loan balances at the rate of $12,000 per year for each of them. She made good on her promise by making the first payment.
Then tragedy struck. Early in the divorce proceedings, she was killed in an automobile accident. Mary’s lawyer had given her a list of documents to bring to their second meeting, including beneficiary designations for her IRA. But she never made it to that second meeting.
As they grieved the loss of their mother, Sarah and James were stunned to learn that the IRA now belonged to their father, from whom they had been estranged and who many years earlier had been designated as the beneficiary of the IRA.
Sarah and James asked their mother’s lawyer if they could stake a legal claim to the IRA. His response was simple: No. In this case, the beneficiary designation was the final word. To further clarify the point he told them that even if Mary had changed her will to leave the IRA to them, the beneficiary designation would have trumped the will.
Perhaps the most important lesson here is to be aware that legal documents you may have signed many years ago can have big consequences.
That means it’s smart to review these documents periodically to make sure they reflect your current wishes. It certainly makes sense to review your designations after major life events such as a marriage, divorce, birth or death. Updating contact information is a good part of this periodic review.
Some aspects of estate planning are complex and require the services of an attorney. But designating a beneficiary – and changing that designation – is as easy as filling out and signing a form.
Who you designate as your beneficiary is entirely up to you. There are a few things to keep in mind.
A minor can inherit financial assets but cannot legally control them. If you intend to leave assets to a minor, name a custodian or guardian who can manage the assets until the beneficiary reaches the legal age of maturity.
You can designate a contingent beneficiary to receive the property in case the primary beneficiary is unable to do so. This is a good idea, and ideally it should be part of an overall plan for distributing your assets at your death. If no contingent beneficiary is designated for a retirement account, your will determines what happens to the account.
Many people are fairly sure who is named as beneficiaries on their accounts. But sometimes they are wrong. Even if you’re certain, it never hurts to get a copy of the documents from the custodians of your accounts. If necessary, your financial advisor can help you nail down this information.
Designating your beneficiaries is only one part of estate planning, but it’s an important one. Before you meet with an attorney to prepare or review your will, make sure you know who you’ve designated as beneficiaries for your IRAs, 401(k) accounts and insurance policies.
Sarah and James
Fortunately, Mary’s children fared better than they might have. The death of their mother brought them and their father closer together. He carried out their mother’s wishes by promising to honor her pledge to give them each $12,000 a year toward their education loans.
In addition, the father completed the necessary paperwork to have Sarah and James named as beneficiaries of the IRA account. Although they unfortunately lost their mother, her wishes were not entirely thwarted.
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Lowell developed a passion for finance in high school, after some hard lessons learned. Now as a Wealth Advisor, he appreciates the opportunity to help his clients articulate, achieve, and expand on their financial and associated life goals. He particularly enjoys working with mid-career technology professionals.
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