You Have to Understand How Your Assets Pass at Your Death

Posted by Harvey L. CoxJul 22, 20210 Comments

Contrary to popular opinion, your will doesn't necessarily control how your assets pass at your death.  You may hold most of your wealth in assets that pass outside of your will.  For example, if you have a retirement plan, life insurance, or IRAs, those assets aren't usually subject to probate.  Your will does not affect how those assets are distributed at your death because they aren't subject to the probate process.  If you have a retirement plan, IRA, or life insurance, they pass to the beneficiaries you name on a beneficiary designation form with the issuer of those particular assets. 

Example:  Ben is single.  He names his brother Larry as the sole beneficiary in his will.  He also names Larry as the beneficiary of his retirement plan and his life insurance.  A few years later, Ben marries Glenda.  After marrying Glenda, Ben changes his will to leave everything to her.  However, Ben doesn't change the beneficiary designations on his retirement account and his life insurance.  Tragically, Ben dies in an auto accident a year after marrying Glenda.  Ben's retirement account and life insurance make up the bulk of his estate.  Those accounts pass to his brother Larry, not his widow because Ben failed to change the beneficiary designations after his marriage.

Example:  Phil and Donna have been married for six years.  They have two children, a son, Darren, who is five years old, and a daughter, Sabrina, who is three years old.  Phil and Donna buy $500,000 of life insurance for themselves.  Phil names Donna as his primary beneficiary and his children, Darren and Sabrina, as secondary beneficiaries.  Donna names Phil as her primary beneficiary and her children, Darren and Sabrina, as secondary beneficiaries.

Two years later, Phil and Donna have another daughter, Samantha.  Three years after Samantha's birth, Phil and Donna died in a car accident.  Because they named only their first two children as their secondary beneficiaries, those two children, Darren and Sabrina, are the only two children to receive a payout from the life insurance policies.  Their younger child, Samantha, is effectively disinherited for no reason other than a simple oversight by her parents.

The problem illustrated with the estates of Ben, Phil, and Donna is entirely avoidable by reviewing beneficiary designations on life insurance policies and retirement plans.  The Life Insurance and Market Research Association (LIMRA) study found that more than 30% of all life insurance policies, annuities, and retirement plans are not updated to correct beneficiary designations.  I recommend that you review beneficiary designations of your accounts and insurance when significant life changes occur, such as marriages, divorces, the birth of children and grandchildren.  You are responsible for ensuring your beneficiary designations continue to fit your family situation and your estate planning goals.

The example of Phil and Donna's estate also highlights the problem with naming children as beneficiaries. I'll discuss the issue of children beneficiaries in future posts.

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