One of the most overlooked financial tasks that I see as an LGBTQ Certified Financial Planner™ is mistakes with the naming beneficiaries on retirement accounts and life insurance policies.
It doesn’t take that much time to review your beneficiary designations, and it’s relatively easy to update them.
If your beneficiary designations are wrong, or missing altogether, there can be serious consequences. Not only can it cause a disruption in family harmony (or an all out family war), there can be significant tax and legal costs. Perhaps even worse, your legacy is disrupted and your hard-earned dollars won’t go where you wanted them to!
I conduct regular beneficiary reviews with my clients to ensure that their forms are updated and that their wishes have not changed, especially after any major life event.
With new clients coming onboard, I often discover missing beneficiary. The truth is, it’s just an easy thing to overlook.
Retirement accounts such as IRAs and 401ks, and life insurance policies, do not pass according to your will. These financial assets and accounts pass outside of your will or living trust, according to your named beneficiaries. Many people do not realize this.
For those of us who are LGBTQ, I think getting your beneficiaries right is even more critical. Many of us can have challenging and changing family dynamics.
For example, I’ve seen cases where families of a deceased LGBGQ person do not honor and ultimately challenge the partner being named as a beneficiary. This is one of the reasons I’m an advocate for gay marriage if you’re in a monogamous, long-term relationship.
A designated beneficiary should be a person or a trust. It should not be your estate! If the case of naming a trust as a beneficiary, the trust would dictate where the funds go and how they are to be distributed.
Unfortunately, many people invest in having a living trust set up but neglect to add the trust as the beneficiary to their various financial assets and accounts! That is a critical step that often gets overlooked.
In naming designated beneficiaries, you want to name both primary and contingent (in case your primary beneficiary pre-deceases you, or in case a primary beneficiary decides to disclaim their interest). You could also name a charitable organization. Learn more about LGBTQ charitable giving strategies here.
You can split up what each beneficiary would receive any way you’d like to. For example, you could allocate 50% to one person and 50% to another – as long as the total adds up to 100%.
If you have a minor beneficiary (child under the age of 18), there are some special considerations to understand. For example, in order for the minor to be able to “stretch” distributions out of an IRA over their lifetime, they must be named as a designated beneficiary on your account(s), or the stretch benefit is lost!
Don’t forget to actually let your beneficiaries know that you’ve named them! There are $1B in life insurance proceeds that are unclaimed! Make copies of your beneficiary forms and let your loved ones know.
Other life changes that may necessitate a beneficiary review:
Have any individuals named as beneficiaries passed away? Are there any individuals (or charitable organizations) that should be added or removed as beneficiaries? Have there been any marriages or divorces, that would impact your estate plan? Is there a beneficiary with special needs receiving government assistance? Do you need to protect any beneficiaries from a divorce, creditor issues, substance abuse or gambling issues?
For employer-related retirement accounts such as 401ks, make sure your employer has your beneficiary information and/or forms on file. Check with your financial advisor or custodian (if you don’t have an advisor) to make sure you have accurate beneficiary forms on file for personal accounts including IRA’s, annuities, and small business retirement plans. Also check with your insurance agent for life insurance beneficiary forms.
If you have parents who are still living, I also recommend reminding them to review their beneficiary designations for accuracy and completion.
For financial assets and accounts that are not beneficiary-driven, that’s where a will takes over, or in some cases a living trust.
It’s easy to overlook naming your beneficiaries, but don’t procrastinate on this. It’s a quick task to accomplish, and you’ll feel better once you conduct your review!
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