When you have any major family life event—marriage, divorce, birth, or death—you need to revisit and perhaps revise your beneficiary designations.
Many accounts like 401(k)s, IRAs, insurance policies, annuities, and even some bank accounts pass by beneficiary designation outside of your estate, regardless of what your will or divorce decree dictates. All too often, investors will suffer the consequences of not updating a beneficiary designation. A couple divorces and then someone dies. Account assets then pass to an ex-spouse because the ex’s name is still listed as the beneficiary.
Furthermore, 401(k)s are treated differently than IRAs or other accounts—they’re governed by the Employee Retirement Income Security Act (ERISA), a federal law. If you have a 401(k) and do not designate a beneficiary and you die, your account balance will generally pass to your spouse. If you are single, the beneficiary defaults to your estate, and distributes according to your will. If you do not have a will, state law distributes your assets per intestate succession, usually children, parents, siblings, etc.
Most employees commonly name their spouse as their beneficiary and their children as contingent beneficiaries, generally presenting no problems. However, if you are married and do not wish for your 401(k) to go to your spouse, federal laws require you to have spousal consent stating that they know they are not the beneficiary. Distribution becomes tricky if you die with named beneficiaries and no spousal consent. Many retirement plans are required to distribute benefits to participants through a Qualified Joint and Survivor Annuity; however, others may end up in the court system for years before determining a rightful heir.
You can name a trust as the beneficiary of your 401(k), with your assets then distributed according to the terms of your trust. If your spouse is a beneficiary of the trust, a signed consent form from your spouse may not be required. Furthermore, you don’t need to include a detailed description of the terms of the trust—just enough identifying information to name the trust as the beneficiary.
In contrast, IRAs are governed by state law. If you divorce and fail to update your beneficiary, most states will treat the ex-spouse as “deceased” when determining heirs. Unfortunately, Georgia is not one of the states. As for wills, Georgia law is clear about recognizing a divorce, but the statute does not cover IRAs. Again, not updating your beneficiary could result in your heirs seeking court orders to determine the distribution.
The misconception is that you must have a lot of money to need a trust or estate plan; in reality, the estate plan is there for those left behind who pick up the pieces after you’re gone. Not making it clear who should inherit your assets, can unintentionally cause conflict, anger, and headaches for your loved ones—probably not the memory you want to leave. Updating beneficiaries is not hard to do. In most cases, you don’t need a witness or notary—it is as simple as signing a form.
If you have questions on how to clearly express your wishes for your assets once you’re gone, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the July 8, 2022 “Henssler Money Talks” episode.
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