There are certain assets, such as retirement plans, that grant you the ability to designate certain people that you would like to receive the asset at the time of your death.   The primary assets that have this ability built in are Retirement Plans (401(k), IRA, 403(b)…), Life Insurance, and Annuities.  For these assets, you have the control.  However, with that control comes some risks.

For example, Brian and Tabitha are married and they both have their own 401(k).  Each of their accounts names their spouse as their primary beneficiary, however, they failed to name a secondary (or contingent) beneficiary.  In the normal course of events, this won’t cause a problem – when Brian dies, the 401(k) goes to Tabitha, and vice versa.  But what happens if they both die?  Couples generally travel together, ride in the same car together, live in the same house…etc, and a tragic accident may befall them both while they are together.  Now, because a second beneficiary was not named, we have a Probate issue.  This means that the funds in both of their 401(k)s will have to go through the courts to determine who gets these assets.

Let’s explore another scenario that we see fairly often.  Brian passes away and Tabitha, because she is facing a lot of work and emotional difficulty due to her husband’s passing, neglects to update the beneficiary designation on her 401(k).  When Tabitha later passes away Brian is still listed as her beneficiary for her retirement plan.  Because her soul beneficiary listed on her 401(k) is deceased, the asset must now go through probate for the judge to decide its distribution.

Perhaps the worse and most difficult situation that we see regarding this matter occurs when beneficiary designations are not changed after a divorce.  Brian purchased a Life Insurance policy in which he had named his former wife, Judy, as the beneficiary. Years after Brian and Judy divorced, he met and married Tabitha and executes a will naming her as his sole heir.  While Brian did make an important step by creating a will, he forgets to change the beneficiary designation on the Life Insurance.  What Brian does not realize is that when he dies, his ex-wife Judy will get the Life Insurance proceeds – regardless of what his will says.

To avoid these types of situations, make sure you review your beneficiary designations regularly.  In fact, we recommend reviewing them yearly as well as after any major life change.  If you have a properly drafted estate plan, you reduce this complexity by naming your living trust as the beneficiary of those assets in order to ensure that all your assets are distributed according to the dictates of your living trust.

For more information or to schedule a free consultation, contact us today at 888.222.1328.

Contributed by MH New Mexico Estate Planning Attorney James P. Plitz

About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.