Rowe & Walton PC
When we think of “fitness” resolutions, our minds often jump to gym memberships or healthy meal prep. However, as Robyn Walton of Rowe & Walton PC points out, one of the most critical resolutions you can make is for your “financial fitness”. A simple, high-impact goal for any year is to review the beneficiary designations on all your financial accounts.
Most people only consider beneficiaries when they first open a bank account or start a new job. It is a process that is frequently skipped with the thought, “I’ll figure it out later.” Unfortunately, “later” can be too late. If you die without a designated beneficiary on your bank accounts, life insurance policies, or retirement plans, those assets will likely be forced into probate.
Probate is a court-supervised process used to determine who is entitled to control and receive your assets. It can be a lengthy, public, and expensive hurdle for your grieving loved ones—a hurdle that is often entirely avoidable with a few minutes of administrative work.
Naming a beneficiary on a retirement account is not just about who gets the money; it is a major tax decision. For married couples, listing a spouse as the primary beneficiary is vital for income tax reasons. This allows the surviving spouse to “rollover” the funds into their own account without the immediate tax on a distribution.
Federal law also places strict protections on these accounts. If you wish to name someone other than your spouse as your beneficiary, your spouse must provide written consent. Regardless of who you choose, you should always name a contingent or secondary beneficiary to ensure the asset remains protected if your first choice dies before you do.
While it is common to want to leave assets to children, doing so directly can lead to unintended consequences. You must be specific about how shares are distributed and what happens if a child predeceases you. Crucially, listing a minor or a disabled child as a direct beneficiary is a significant risk. Such a move may force the court to appoint a Guardian to oversee the funds or, worse, disqualify a disabled child from essential government benefits like Medicaid or Social Security Disability.
Perhaps the most dangerous misconception is that a divorce automatically wipes out old beneficiary designations. Federal law often trumps state law in these matters, as illustrated by the tragic case of Mike Jones. Despite being divorced for 15 years, Mike has never updated his 401(k) and life insurance forms. Upon his unexpected death, his accounts were paid to his former wife rather than his children. To recover those funds, his children were left with the painful task of suing their own mother.
Beneficiary designations are a cornerstone of a detailed estate plan, working in tandem with your will or trust. Because these choices involve complex federal laws and family-specific needs, they should not be made in a vacuum. Before updating your forms, seek qualified advice from an elder law attorney to ensure your “financial fitness” resolution truly protects your family’s.