Outdated Beneficiaries Could Blow Up Your Estate Plan
Last month was Make a Will month and hopefully many of you were inspired to get your wills created or updated. Heading into the holiday season, you can relax, put your feet up and feel satisfied that you have your affairs in order. But wait, are you sure about that?
Have you reviewed your beneficiary designations lately? You know, the designations you named on your life insurance policies, investment accounts and pension plan.
That’s what this month’s article is about:
Three key reasons to regularly review your beneficiary designations.
Surprise—your ex-spouse just inherited all the assets under your investment accounts and $500,000 life insurance policy. Whoops!
Let’s take a look at each of the reasons why updating your beneficiary designations is important.
1. Ensure Your Assets Go to Intended Beneficiaries
If you don’t update and coordinate your designated beneficiaries with your will, you could inadvertently blow up your estate plan leaving assets to those you no longer intend.
When you designate beneficiaries under an insurance policy, investment account or pension, you are bypassing your estate. Upon your death, these financial institutions will pay the named beneficiary directly and will act independently of any directives in your will.
Review Your Designations and Consider
Review your records and reassess each asset, investment account, pension and insurance policy and ask yourself:
- Have your relationships or any other life factors changed?
- Have the circumstances or finances of your beneficiaries changed?
- Has the value of the account changed significantly over time?
- Do these beneficiary designations line up with your overall estate plan and the distribution plan for the other assets included in your will?
This last question is an important one, especially because many forget they designated beneficiaries under these accounts and assume all their assets are included in their will.
Two months ago, this very situation occurred with a friend of mine. He lived with his life partner, but their relationship had been difficult for several years. He updated his will and named his grandchildren from a previous marriage as sole beneficiaries. However, upon his death it was discovered that his life partner was the designated beneficiary under his life insurance policy and investment accounts.
There were limited assets in his estate to distribute to his grandchildren. Was this intentional? Or did he simply forget or not realize that beneficiary designations under life insurance and financial accounts bypass the estate?
Beneficiary designations on life insurance, pension, and investment accounts bypass your estate and are distributed directly to the beneficiary.
Life Events that Trigger a Review
There are many events throughout our lives that trigger a review of our estate plan and intended beneficiaries.
Marriage/Remarriage/Divorce – Divorce does not automatically revoke an ex-spouse’s beneficiary status. Ensure you update the beneficiary designations on your life insurance, financial accounts, and will to reflect your current wishes. Also, check your divorce decree, as it may mandate that the ex-spouse remains a beneficiary.
Birth/Adoption of a child – Update designations to recognize new members of your family. This is essential if the assets are equally divided among a named group. You do not want anybody you care about to be left out.
Death of spouse or beneficiary – if your spouse or another beneficiary dies, you’ll need to update the beneficiaries on your accounts if you do not have alternates named.
2. Avoid Family Disputes
In the scenario outlined, the financial institutions have no doubt that my friend’s life partner will inherit the proceeds from the life insurance policy and investment account. However, the grandchildren’s parents may have a different perspective on who should receive the funds.
Sadly, this situation occurs more often than you’d think. Failure to review and update beneficiary designations can lead to considerable stress about what was truly intended resulting in family discord, potential litigation and alienation amongst family members.
3. Avoid Probate and Tax Consequences
So why risk designating beneficiaries for life insurance and investment accounts if it could lead to misalignment with the intentions of your will and cause family strife?
Because doing so avoids probate fees, also known as estate administration tax. Only assets that form part of the estate are subject to probate fees. In some provinces the fees are high enough (1.5% of asset value above $50,000 in Ontario) to take a big bite from an inheritance that would otherwise be available to your loved ones. Learn more about probate in our blog article Probate by Design.
When beneficiaries are named in both your will and on financial accounts, it’s important to consult an estate planner. Without proper coordination, you might unintentionally create an unequal distribution of assets or impose unexpected tax burdens on those named in your will.
For example, if one child is designated as the beneficiary of a $500,000 investment account and another child is beneficiary of $500,000 of assets in your will, the child receiving their share through the will would only get what remains after the estate pays debts and taxes.
Collaborate with an estate planner to ensure you avoid unintended distribution inequities amongst your beneficiaries.
Tips When Naming Beneficiaries
Here’s a few things to remember when choosing who to designate as a beneficiary under your financial accounts or life insurance policy:
- Canadian law requires the first beneficiary of your pension is your current spouse. Any alternative selection requires your spouse’s consent
- To avoid probate fees in the event of your primary beneficiary’s passing, it’s important to name both primary and contingent beneficiaries
- You can select non-family members or multiple recipients
- You may want to research the merits of setting up a trust if beneficiaries are minors.
Conclusion
The last thing anyone wants is to cause confusion and stress for their family over what their intentions were about distributing their assets.
Make sure your will is clear and consistent with the beneficiary designations on your life insurance policies and financial accounts. Doing so allows you to create an estate plan that reflects your true intentions.
After wrapping up your review, you can rest easy knowing your affairs are in order – and take time to wrap your gifts, relax and enjoy the holiday season!
Did this article provide insight on the importance of reviewing your beneficiary designations?
We’d love to hear if this article prompted you to look up who is designated as beneficiaries under your life insurance and investment accounts . Share your story with us.
Financial Concierge offers Professional Executor and Power of Attorney services to assist with executor, attorney duties or help with managing daily financial activities. Learn more about Financial Concierge here.
Author: Janet Jackson, Contributor: Jill Chambers
DISCLAIMER: This blog is not intended to be legal or financial advice and should not be construed as anything other than for information purposes.
