You’ve reviewed your estate-planning checklist and everything seems in order. That estate-planning checklist probably includes important tasks like, “Update my will (check),” “Update my powers of attorney (check),” and “Talk with my family about my wishes (double check).”
But there may be a hidden time bomb lurking in your past that your estate-planning checklist has overlooked. If you ever took out a life insurance policy or opened a retirement account, you filled out a form that designated a beneficiary – the person who would get those funds upon your death. It’s possible that you had long since forgotten about that piece of paper you signed all those years and several jobs ago.
Here’s the point: today, even decades later, if your estate-planning checklist doesn’t include “Update all beneficiary designations,” your heirs could be in for a costly shock. As this article from the Wall Street Journal explains, your will alone won’t ensure that your money goes where you want it to go – namely, to your heirs. That’s because those beneficiary forms you filled out years ago can supersede your other estate plans
Let’s take a look at this important issue for your estate-planning checklist. The Wall Street Journal article was written by reporter Ashlea Ebeling.
Estate-Planning Checklist: Divorce Triggers a 6-Year Legal Fight
Ebeling begins her Wall Street Journal article with a tale of hasty action gone awry. “When Dr. James Rocconi’s third wife left him,” Ebeling writes, “he rushed to update his will and other estate-planning documents to ensure she would get nothing when he died. But since the handwritten change he faxed to his insurance company wasn’t accepted, his three children from his first marriage ended up in a six-year legal fight with her over the benefits after he died in 2017.”
Dr. Rocconi’s son, also a veterinarian like his late father, was adamant. He told the Wall Street Journal, “[Dad] told me what he wanted. I wasn’t going to let her win.” The younger Rocconi was executor of his father’s estate.
After the six-year legal battle ended, says the article, the son finally got his share of the life-insurance money. “He donated it to his dad’s church in Camden, Arkansas, to upgrade the kitchen where his dad used to bring home-baked cheesecake pies to spaghetti supper fundraisers.” In the son’s words, “I just wanted him vindicated.”
Estate-Planning Checklist: Beware of False Assumptions
“Many people assume their will is the final word on who gets what when they die,” Ebeling writes. “But some documents can override wills, and chances are you have already filled them out: the beneficiary forms for retirement accounts, life insurance, and some bank and brokerage accounts. This is true whether the accounts are opened through the workplace, or on your own.”
The stakes are surprisingly high, and every year many families pay the price of incorrect beneficiary forms. “Get them wrong and your assets could end up with an ex-spouse or in a court battle,” the Wall Street Journal warns. “Estate planners say this is a growing issue as more Americans juggle multiple accounts, and have more of their net worth in retirement accounts.”
Estate-Planning Checklist Incomplete Unless Forms Match Intent
For her article, Ebeling spoke with Illinois-based benefits lawyer Frank Del Barto. “At the end of the day, you’ve got to ensure that the beneficiary forms match your intent and your estate plan,” he said. Del Barto added that the hardest part of his job is writing denial letters to would-be heirs. The thrust of those letters is harsh, but clear, says the article: “Sorry for your loss…and sorry you aren’t entitled to the money.”
Estate-Planning Checklist: Different Accounts, Different Rules
Beneficiary designations can get tricky, the article says. “To complicate matters, the rules vary for beneficiary forms for different types of accounts,” Ebeling writes.
“With 401(k)s, married spouses are essentially automatically entitled to the money unless they formally waive it,” she explains. “The waiver must be notarized. If there is no beneficiary listed and no spouse, the employer-plan documents determine who is next in line.”
While this makes sense, in practical terms in can cause shockwaves for adult kids who thought they had money coming. “In one common scenario,” says the article, “an employee divorces and names an adult child as his or her new 401(k) beneficiary and then remarries. Under federal law, the new spouse gets the 401(k), no matter what the beneficiary form or will says.”
Estate-Planning Checklist: IRAs and Insurance Policies
Ebeling goes on to explain that different rules also govern IRAs. “With individual retirement accounts, by contrast, in most states you can name someone other than your spouse as beneficiary without getting a waiver from your spouse,” she explains. If you live one of the eight remaining community-property states (including Washington, home to AgingOptions and Life Point Law), you will need a waiver. If there is no beneficiary listed, the terms of the IRA agreement determine who inherits the IRA.
Still another set of rules applies to insurance policies. “With insurance payouts, if the policy is a workplace plan obtained through your employer, the employer-plan documents control the payout,” says Ebeling. “If the policy was purchased on your own, the insurance company’s rules govern, and battles typically end up in state court.”
Estate-Planning Checklist Derailed by Faulty Paperwork
It was this last situation that caused the battle for the Rocconi family. “James Rocconi faxed a handwritten change of beneficiary form, listing his children, to the insurer, but he didn’t sign it,” the Wall Street Journal reports, “so the insurer didn’t accept it, leaving his ex-wife as the named beneficiary.”
When the insurance company balked, Rocconi’s children intervened. “He filled out the paperwork. They had voice recordings,” Tony Rocconi told the Journal.
Earlier this year, the Arkansas Supreme Court agreed with the family that James Rocconi had “substantially complied” with the insurance company’s policy requirements to change a beneficiary. (A lower court had sided with the ex-wife.) “Among the evidence presented,” Ebeling reports: “On one of the recordings, James Rocconi said, ‘I’ve got to get her off.’”
Estate-Planning Checklist: Take Beneficiary Forms Seriously
Still, the article warns, courts won’t always make such common-sense decisions. “Sometimes even the best intent doesn’t cut it if the account owner didn’t finish the process of changing the beneficiary,” says the article. The article offers several ways to “bulletproof your beneficiary forms.”
“Beneficiary designations are often an afterthought. People dash them off at home after work,” Massachusetts estate lawyer Kenneth Brier told the Wall Street Journal. Every time you take a new job or transfer funds between accounts or institutions, you will need to fill out a new form.
When you do, says the article, don’t scrimp on the specifics. “Be sure to include details about your beneficiaries such as date of birth and Social Security number,” the article suggests. “In one case involving a $1.1 million IRA, Brier said the custodian gave up on finding an heir listed as living in Moscow, with no other identifying information.”
Estate-Planning Checklist: Make Sure Documents are Up-to-Date
Make sure you avoid what the article calls the “common mistake” of failing to update the forms when life circumstances change. “If you get married, divorced or have children, make sure you make revisions,” Ebeling writes. As Los Angeles attorney Robert Barton told her, some states have laws that automatically revoke a designation upon divorce, but others don’t.
“With bank and brokerage accounts, people will often add a payable-on-death designation by filling out a special beneficiary form for convenience and then forget about it,” says the article. “That can cause disputes between children who feel they were treated unequally.” Barton’s advice is to review your forms and tell your family about your wishes in advance.
Estate-Planning Checklist: Make Sure Everything in Sync
Like moving parts of a well-oiled machine, all these accounts and policies should sync with your overall estate plan, says the Wall Street Journal. Otherwise, your intentions for your bequest might easily be unmet.
Moreover, says the article, make sure you keep copies of beneficiary forms with your other estate-planning documents. Attorney Barton gave Ebeling an example: while settling a $25 million estate, two siblings became embroiled in a battle over a $500,000 bank account. “One claimed it was a payable-on-death account, naming her as beneficiary, but the bank couldn’t find any paperwork,” the article relates. “The case settled, Barton said, but much of the account value was depleted by attorney fees.”
One expert consulted by the Wall Street Journal said he recommends sending duplicate beneficiary forms to the bank or brokerage house or insurance company and asking for one back with a stamp that says it was received. “You have to prove they got it,” he said.
You also may be able to check your account profile online to see if the company has made the change you requested, the article concludes. But whatever method you employ, you can save your heirs a ton of grief and expense with some due diligence ahead of time.
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(originally reported at www.wsj.com)