Use Care: Beneficiary Designations Trump Your Will or Trust.
Always a good thing to meet with your investment adviser and have your insurance coverage and investments properly aligned to meet your needs. However… Some times … after all that planning … the act of filling out your beneficiary designation forms might seem like an afterthought.
As mundane as the beneficiary designation process may seem, it is important to keep in mind that the beneficiary designation form on file with the company will control ownership and distribution of the life insurance policy/individual retirement plan after you die: Not your will or your trust.
Example: If you have a life insurance policy for $100,000.00 and you name your son Mickey under the beneficiary form, Mickey gets the cash on your death. If you also named Minnie to receive your assets under your will, she sees none of that money.
Knowing that the designation trumps the Will or Trust, great care should be used when filling the beneficiary designation form out.
The Change Forms the Companies offer are not always understandable or helpful.
The insurance companies and IRA custodians have pre-printed beneficiary designation forms that they make you use. Keeps them out of hot water because they are a consistent element of their operations, which leads to fewer mistakes when the time comes to process them. They are (for the most part) constructed to fit the company’s processing needs but can sometimes fall short when they are being used to meet your goals. This is because sometimes the company’s processing needs are not lined up with your wishes.
Ask yourself some questions when filling out these forms.
What happens if one of my beneficiaries dies before I do?
One of the biggest surprises for unwary clients is that so many of the forms default to the “survivorship rule”. These forms with the survivorship rule in them divide a predeceased beneficiary’s share equally among the surviving beneficiaries. This “survivor takes all” result works for some people, but not most people. For example, some folks would like to see a grandchild take a predeceased child’s share rather than leave the grandchild out by having the proceeds split only between the children lucky enough to survive them.
If the survivorship rule is not what I am looking for, what are some alternates available?
So now we enter into the world of Latin phrases. But … do not worry. These are not as hard to grasp as it might seem. There are two main phrases to remember: “by right of representation, per stirpes” and “by right of representation, per capita”. The term “per stirpes” means by root or branch, while the term “per capita” means by head.
Per stirpes: Per stirpes is the most popular of these two alternatives. Per stirpes boils down to meaning that the percentage planned for one beneficiary that predeceases goes to the deceased beneficiary’s heirs by blood: Often their children or grandchildren.
Example: If your son Mickey was entitled to 50%, but died before you did, his two surviving kids (your grandkids), Tammy and Timmy would each take 25 %. Your surviving daughter, Minnie is entitled to the other 50%.
Per capita: Per capita is the rarest of these two alternatives. Per capita boils down to meaning that the percentage planned for one beneficiary that predeceases is ignored. Instead the deceased beneficiary’s heirs by blood: Often the decease beneficiary’s children, step up onto the same level as you children.
Example: Your son Mickey was entitled to 50%, but died before you did and your surviving daughter, Minnie was entitled to the other 50%. Mickey had the two kids Tammy and Timmy. Tammy and Timmy step up on the same level as Minnie. That means Minnie, Tammy and Timmy would each receive 33 1/3%.
What most people want is a per stirpes distribution at death vs. the survivorship rule or a Per capita distribution.
What happens if I run out of listed beneficiaries?
The answer here can be found on the form but also may be in the policy or contract itself. Some companies default to have the proceeds paid to your estate, while some set your spouse, children and/or parents as beneficiaries if you run out or fail to name any beneficiaries. Definitely get this question answered.
What to do.
Be sure to read the default provisions in your beneficiary designation forms. You need to know what they say so that you can make any appropriate changes to them. Customize your designation if you have to do so. In many cases, the beneficiary designation forms can be customized to meet your wishes by adding and addendum (attachment) to it spelling out your intended desires.
Know that is ok to seek help too. A qualified estate planner can help you spot issues and help you to modify the beneficiary designation form so that it aligns with your wishes.