By Attorney Maria Baler (August 2013)

Beneficiary designations are an often overlooked aspect of estate planning. While most people understand that they can designate a beneficiary for their life insurance and retirement accounts, they do not necessarily understand that the beneficiary designation forms control those assets absolutely. This is true regardless of how long it has been since you designated the beneficiary, what your current intentions may be, or what your Will or Trust may say. Here are five reasons to review beneficiary designations from time to time:

1. You Change Jobs. I often receive calls from my clients when they change jobs because the HR department has given them lots of forms to fill out, including beneficiary designation forms for their group life insurance policy and their 401k. These forms are often filled out in haste during a hectic first week when the new employee has lots of other things on his mind. New forms are also required if you add additional life insurance or if your company changes 401k providers. In these situations, it’s easy to simply list your spouse as the primary beneficiary of your life insurance and retirement accounts, and your children as the equal contingent beneficiary, and move on to the next form. However, take the time to think about those designations to be sure that they are consistent with the rest of your estate plan. If you have set up a trust for the benefit of your young children or for estate tax planning purposes, should the trust be named as the beneficiary? You may not know the answer to that question, but your estate planning attorney will. Take the time to make a call or send an email to be sure those designations are made correctly.

2. Your Marital Status Changes. As a result of the recent enactment of the Uniform Probate Code in Massachusetts, beneficiary designations in favor of a former spouse are deemed void after a divorce. However, there is some question about whether the terms of an individual retirement plan or federal ERISA law could override this provision of state law. To be safe, if you are recently divorced you should update your beneficiary designations to reflect your current intentions. Conversely, if you are newly married, it is important to review and update your beneficiary designations as well.

3. Your Estate Plan Changes. A good estate plan will change as an individual’s circumstances change. A trust that was the beneficiary of your retirement account when your children were young may no longer be appropriate when they are having children of their own. A previously responsible child may develop a drug or alcohol addiction, or have a tendency to spend money inappropriately. It may become appropriate to leave your assets, including life insurance or retirement benefits, in unequal shares to your children for various reasons. Grandparents may wish to name grandchildren as beneficiaries if their children have sufficient wealth. For all of these reasons and many others, the manner in which you designate family members as beneficiaries of your life insurance or retirement accounts may need to change as time goes on. Don’t forget to revisit beneficiary designations when making changes to your estate plan so that they are consistent with each other.

4. It’s Time to Consider the Tax Implications. How retirement benefits are distributed at the death of the retirement plan participant can have significant income tax implications. This may not warrant a lot of thought if you have $20,000 in your retirement account. However, as time goes on, many people build up considerable wealth in their retirement plans. A beneficiary who receives a large lump-sum payment from a retirement plan will also receive a big income tax bill and lose a significant portion of the account to income taxes. It is possible to reduce these adverse income tax implications with thoughtful planning (see #5 below). Life insurance and retirement accounts are also subject to estate tax at the owner’s death. Planning can also reduce the impact of this tax, for example, through the use of irrevocable trusts or, for those with charitable intentions, by leaving these assets directly to charity.

5. Consider How — not just Who. All of that wealth in your life insurance policies and retirement accounts could have a significant impact on the beneficiary who receives it (or who has the option to receive it) in one lump sum. In addition to the income tax impact (see #4 above), receiving a large amount of money all at once may have an adverse impact on a beneficiary’s work ethic and lifestyle. If the timing is wrong, inherited assets can be lost to creditors, divorce, bankruptcy or other troubles. If a beneficiary is disabled and receiving public benefits, receipt of payments from life insurance or retirement benefits can result in disqualification from these very important benefits. In addition to reviewing who is named as beneficiary of your life insurance and retirement accounts, consider how they will receive the funds and whether controlling the manner in which that happens is in the best interest of your beneficiary.

Life insurance and retirement accounts often hold significant wealth but receive less attention than they deserve when it comes to planning. Review your beneficiary designations periodically to ensure they are consistent with your planning goals while being mindful of tax and other implications.

Attorney Maria C. Baler is an estate planning and elder law attorney and a partner with the Dedham law firm of Samuel, Sayward & Baler LLC. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information, visit www.ssbllc.com or call (781) 461-1020.