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Is Your Beneficiary Still Your Buddy?

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Is your beneficiary still your buddy? Have you given any thought to the beneficiary designations on your IRA, 401(k), or life insurance policies recently? If not, you should.

When you originally opened these accounts or took out these policies, you probably named somebody you actually wanted to receive the money at your death. You probably even liked them. The choices you made then probably made a lot of sense. Is that still the case?

It’s vitally important to review these designations. No review of your estate plan is complete without doing so.

A lot of clients I speak with have a fundamental misunderstanding about what having a will means. The misunderstanding is that when they die, all of their assets will be distributed based on what their will says. This is not true. Beneficiary designations supersede will distribution clauses.

Take, for example, a client who owns only a small checking account and a large IRA. We’ll call him Russell. This client has two children – Charlie and Francisco. Russell set an IRA up for himself long ago; before Francisco was ever a glimmer in his eye. Since his only real family was his son, Charlie, he named Charlie as the sole beneficiary of his IRA. He contributed to this IRA faithfully over the years, scrimping and saving money for retirement and also to leave a legacy for his children. Recently, Russell had a will written which leaves everything to Charlie and Francisco in equal shares. He fully expects that everything that he has will be split between Charlie and Francisco at his death. He would be mistaken because he never updated his beneficiary designation for his IRA to include Francisco.  So Francisco will be entitled to half of the paltry sum in Russell’s checking account, but will not receive half of Russell’s large IRA.

It’s easy to see how an overlooking beneficiary designations could fundamentally alter or even derail an otherwise well drafted estate plan. I often tell clients that I can write a beautiful will for them but it could be all for nothing depending on how the rest of their estate is structured.

As always, it’s important to review your estate planning periodically. I recommend that my clients have their plan reviewed approximately every five years. If significant life events occur in the meantime, it’s a good idea to have your estate plan reviewed then as well.

Two weeks ago my life was forever changed as my wife and I welcomed a daughter, Adeline, to the world. In an effort to not merely advise others to do as I say and not as I do, I’m also off to review my own beneficiary designations. I need to make sure that my beneficiaries are still my buddies.