Broker Check


Whenever we gather data on new clients, one of the first things we examine are the beneficiary designations on life insurance policies, annuities, retirement plans and trusts. It is a never ending source of amazement to me that we often discover that ex-spouses, deceased relatives, the estate and minor children are the named beneficiaries of these assets. The failure to review and correct faulty beneficiary designations can result in a myriad of problems. Often these issues arise because individuals elect these designations when the account or asset is established and fail to periodically review them as circumstances in their lives change.

As an example, approximately 18 years ago, I was referred to a woman who had just been notified that she was the sole named beneficiary on her deceased ex-husband's significant retirement account. While the ex-husband remained single, my new client had been remarried for a number of years. This unexpected windfall transformed my client's life as it allowed her to become financially independent just as she approached retirement. While the relationship between the divorced couple had remained amicable, we were left to wonder if it was the deceased's intention or oversight that kept his ex-wife as beneficiary.

The example described above represents one of the most common issues we uncover after examining beneficiary designations on retirement plans. Another situation we encounter is the naming of a non-spouse as beneficiary. In order to earmark assets for an inheritance, some married individuals decide to leave their IRA to their children or grandchildren rather than their spouse. In this case when the account holder dies, the beneficiaries would be required to take distributions immediately that are subject to state and Federal income taxes even though they may not have attained age 70½. The result is the payment of current income taxes that may have been avoided for many more years. Since only spouses are allowed to maintain an IRA resulting from the death of an account holder, the better decision may have been to name the spouse as beneficiary. This choice would allow the spouse to retain the same flexibility of managing distributions and taxes as did their deceased spouse. The objective to leave children and grandchildren a legacy may have been better achieved by bequeathing other assets with more favorable tax treatment.

Sometimes, we become aware of a change after it has already taken effect. For example, when we update information about a client's estate plan, we often learn that a trust has been established. Often, death benefits from life insurance policies are a primary asset used to fund these trusts. Upon further investigation, we often discover that the beneficiary on the life insurance policies has not been changed and the trust remains unfunded. In this case, a trust was created that holds no assets and, as a result, fails to achieve the client's objective simply because there was no follow up to ensure that a beneficiary change was completed.

In summary, while the process of updating beneficiary designations is often at the bottom of the financial priority list, the consequences of ill suited choices can be devastating to your family. The remedies for these oversights are generally quite simple.

Estate planning should incorporate a system to periodically review and update beneficiary designations. The key is to work with a knowledgeable and pro-active professional who understands and explains the ramifications of each option to you. As our clients experience continuous changes in their lives, we remain diligent in advising them to make the selections that best advances their legacy objectives.

Happy Spring,

Clifford L. Caplan, CFP®, AIF®