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Importance of Updating Beneficiaries

Several documents in your estate plan may require beneficiaries, including your IRA account, 401(k), life insurance policies, and pensions. Choosing and updating beneficiaries is important because assets in these accounts will go to your beneficiaries upon your death. 

If you aren’t sure whether you need to update your beneficiaries or you don’t know where to start with your estate plan, you aren’t alone. Many California residents do not have a will or trust-based estate plan. Attorney Christopher Heritage of Heritage Legal, PC helps clients in Palm Springs and the surrounding area create thorough, effective estate plans.

What Documents in an Estate Plan Need Beneficiaries?

A beneficiary designation involves naming a person or charity that will directly receive an asset in the event of the owner’s death. One of the main benefits of the designation process includes ensuring the person you name as a beneficiary directly and quickly receives the asset. Most non-probate documents and assets require at least one beneficiary to be listed, including the following:

  • 401(k) accounts

  • Life insurance policies

  • Pensions

  • Revocable trusts

  • Irrevocable trusts

Beneficiaries are different from heirs. The owner of an account or asset chooses the beneficiary. Beneficiaries don’t need to be related to the owner’s assets. On the other hand, heirs are designated by California’s intestate law when a person dies without a will. When a person dies with a will, he or she can designate one or more beneficiaries for his or her probate assets. 


When Should Beneficiaries Be Updated?

You should review and update your beneficiaries any time you experience a major life event, such as the birth of a child, adoption, marriage, divorce, or death of a beneficiary. Other circumstances may also prompt you to update your beneficiaries, such as a falling out with the person you’ve named as your beneficiary. 


Why Updating Beneficiaries Is So Important

Updating beneficiaries is important to avoid your assets being distributed to a person or people you didn’t intend to receive them. For example, suppose a man passes away. He has an employer-sponsored retirement account valued at $400,000. He originally named his wife as the account beneficiary shortly after they married 15 years ago. The couple’s marriage only lasted ten years and at that point they divorced. The divorce decree states that the ex-wife’s right to benefit from this retirement account has been waived. 


However, the husband never changed his beneficiary designation form with his employer. After he passes away, his ex-wife is still listed as the beneficiary account, so the account paid her $400,000. In this case, the court would likely rule that the ex-wife was entitled to the assets in the account because the man never officially changed the beneficiary designation. 


In the Supreme Court case of Kennedy v. Plan Administrator for DuPont Sav. and Investment Plan, 555 U.S. 285 (2009), the Supreme Court ruled that the official beneficiary designation made on an employment-based retirement account supersedes the contrary terms of a divorce decree. In other words, it’s extremely important you update your beneficiary designations after a significant life change. If you don’t, a court may enforce your previous beneficiary appointment. 


Forgetting to Update Beneficiaries Is More Common Than You May Realize

Between personal commitments and work, we all get busy. Sometimes there doesn’t seem like enough time to make it through our “to-do” lists. Many people simply forget about accounts with beneficiaries or don’t realize they need to update them after a major life change. In other cases, people know they need to update the beneficiary on one or more accounts but put it off and then forget to do so. Updating a beneficiary can be put off until tomorrow, next week, next month, and then totally forgotten. 


How to Update Beneficiaries

When updating beneficiaries, it’s important to use the official beneficiary form rather than depending on an indirect method. An indirect method may include making a designation in another separate document in your estate plan or in another legal proceeding. It’s also important to update your beneficiary designations immediately after a major life change. Marriage, divorce, adoption, and other life changes can leave beneficiary designations made years go outdated. 


Factors to Consider When Choosing a Beneficiary

When designating a beneficiary, it’s important to carefully consider your choices. A beneficiary generally needs to be at least 18 years old. If you’d like to name a minor as a beneficiary, you’ll need to set up a trust and designate the trust as the beneficiary. For many, financial dependents are a good starting point when considering who to designate as your beneficiary. Your financial dependents may include your spouse, children, or other extended family members. 


Consider Policy Specific Rules

There may be some limitations from the policy as to who you can select as your beneficiary. For example, if you are taking out a life insurance policy, the beneficiary you name usually needs to have an insurable interest on you as the insured person. There must be a legitimate financial interest between you and the beneficiary, such as in the case of a dependent spouse or child. 


Additionally, some life insurance policies and pension funds have specific rules for designating a beneficiary. Make sure you’re aware of these rules before making your decision. An attorney can help you understand whether you’re following the terms of the insurance agreement carefully. 


Updating Continent Beneficiaries

Naming a contingent beneficiary is also essential. Failure to name a contingent beneficiary can be problematic. If your beneficiary passes away before you do, your asset may need to go through the probate process, and your asset may be distributed to a person you wouldn’t have chosen. Identifying a contingent beneficiary who will receive the asset if the primary beneficiary cannot accept it will help you avoid this problem. 


Discuss Your Case with an Experienced Estate Planning Attorney

If you have questions or concerns related to estate planning in Palm Springs, including how to update your beneficiary designations, don’t hesitate to contact Heritage Legal, PC. Experienced California estate planning attorney Christopher Heritage will be happy to answer all of your questions and help you create or update your estate plan to meet your goals.


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