Reviewing Your Beneficiaries: A Game of Many Levels

During a recent review with a client, I was going over the beneficiaries on his accounts when the client mentioned, “We seem to cover this every few years.  Nothing has changed and we don’t anticipate anything changing.”  I had not noticed until he mentioned it, but it was indeed something that I tried mention to most clients every 2 to 3 years.  It also had not occurred to me that most people are probably like my client; their lives are relatively stable over a 10-15 year period and they never need to change their beneficiaries.  So why was I doing it?  Upon reflection, I had flashbacks of different stories I had read or heard about over the years where improperly addressing beneficiaries had cost a family in one form or another.  It may seem simple on the face of it, but there are many levels to this beneficiary game:

Level 1: Life Changes, Sometimes More Often and Quickly Than You Think

We hear about these life changes all the time, even if we do not want to think about most of them:

  • Divorce
  • Death of a spouse
  • Getting remarried
  • Your child gets married
  • Death of a child

When any of these events occur, reviewing your beneficiaries should be the last thing on your mind.  However, the problem is that many people then forget they must address it at all.  I am reminded of a former 401(k) participant who went through a bad divorce.  He spent his entire career at his company and put the bulk of his retirement savings into his 401(k).  It was clear he would have wanted his children to enjoy that money when he passed.  Unfortunately, he never updated his beneficiary form after the divorce, and his ex-wife was entitled to his retirement savings when he passed a few years later.

Level 2: Many Accounts Equals Many Beneficiaries

Many times people don’t realize how many accounts require beneficiaries.  These accounts can include:

  • Bank Accounts
  • 401(k)s
  • IRAs/Roth IRAs/SEP IRAs
  • HSAs
  • Annuity Contracts
  • Life Insurance Policies

The common thought is that I’ll just cover everything in my will or trust and I won’t have any issues.  However, it’s probable that any accounts which are missing beneficiaries on it will go through probate.  People are bothered by the cost, but I have seen that what bothers people more is how long this process can take.  Perhaps this is anecdotal, but I would encourage you to find someone who was the executor of an estate that was missing beneficiaries and see what they say.

Level 3: Listing Just the Spouse May Not Protect the Family

I believe that this mistake is the most understandable but frequent one that I see.  Most married individuals will list their spouse as their beneficiary when they are young and never revisit the issue.  Down the line, they forget they should place contingent (backup) beneficiaries on their accounts in case something happens to their spouse and them at the same time.  Similar to the above, forgetting to address this removes the guarantee that your assets will go where you wish.  Especially in larger families, I have seen situations where there may be a troubled family member or an in-law for whom you have concerns.  Don’t leave it up to the courts to decide; your money represents your hard work, make sure it goes where you want it to go.

Level 4: Per Stirpes vs. Per Capita (Important for a Sole Remaining Spouse)

So now that you have frequently reviewed your beneficiaries, confirmed you’ve listed them on all proper accounts, and you’ve listed both primary and contingent beneficiaries.  You’ve covered every possible scenario, right?  Think again!  This last level is something that people rarely think to address, and for good reason: On almost all accounts, this choice of “per capita” vs. “per stirpes” usually shows up as a tiny box on the beneficiary form.  However, this choice can be critical for a sole remaining spouse who has multiple children.

Let’s say hypothetically that there is an elderly widow who has 3 grown children, and she would like to leave each of them a third of her sizeable retirement account (and the retirement account she inherited from her husband).  Unfortunately, her son predeceases her and she then dies shortly thereafter.  She would have liked for her son’s share to pass on to his wife and children.  However, because the default for most accounts is “per capita,” the son’s share will be passed along to his remaining 2 siblings.  If the siblings did not get along, the son’s family may not have any of that benefit passed back to them.  If the widow had checked “per stirpes” on the beneficiary form for each of the children, she could have avoided this situation entirely.

The same is true of simply listing “per stirpes” for every beneficiary.  I’ve heard of scenarios where a person’s retirement account went to a son-in-law they did not trust as opposed to their remaining children when they passed.  Many times, a mix of both “per capita” and “per stirpes” will be the right fit for a client.

Many of these situations may seem unlikely, but I can assure you that I have heard of each of these scenarios on more than one occasion.  Other than being cautious, the reason I emphasize this with clients is because of the size of the dollars we are talking about.  Every year I read that 401(k)s and IRAs are the primary place that people are saving their long-term money.  They work hard for decades to grow these accounts, but you can see how these small mistakes can derail your plan for your family’s wealth.  As always, I encourage you to call your advisor at McCabe if any of the above may pertain to you.  I hope this finds you well.

                                                                                                                                                                                                                                                                                                                                                                       George McCabe, CPA                                                                                                                                                                                            Financial Advisor


For a comprehensive review of your personal situation, always consult with a tax or legal advisor.  Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.