You know when you are confident about something, and then you find out that you were wrong? I hate that. But it’s better to find out that you were wrong when you can still fix it.
One part of life where you really need to make sure these things are right is with the beneficiary designations on your various accounts and benefits. This includes not only your bank accounts, insurance policies, and investment accounts, but also any military benefits that can be designated.
What Are Beneficiary Designations?
Beneficiary designations are the instructions you put on financial products (bank accounts, insurance policies, etc.) and benefits that instruct what is to happen to those products when you die.
For bank accounts, there are two parts: how the account is held, aka titled, (individually or jointly, with or without survivorship) and also who is listed as a Payable on Death beneficiary.
Life insurance policies, including SGLI, have beneficiaries. We’ve all heard the legend of the service member who died and accidentally left SGLI to their ex-spouse. That story isn’t just a story – it happens!
Retirement accounts, including the Thrift Savings Plan, have beneficiaries.
For any real property, such as cars and houses, you need to ensure that they’re titled the way you want them to be titled. In some states, you can even do a Payable on Death designation on a house title!
Military members designate beneficiaries for death gratuity and unpaid pay and allowances on their DD Form 93, Record of Emergency Data, which is almost definitely held electronically.
Retired military members designate a beneficiary for any unpaid pay on the DD Form 2656 when they retire, and update beneficiary information using DD Form 2894, Designation of Beneficiary Information.
Why Set Up Beneficiary Designations?
There are two main reasons to set up beneficiary designations to direct your financial affairs, and they are somewhat related. One is to ensure that your loved ones won’t be locked out of their money if you die. The second is to keep those funds out of probate, which is the legal process by which an estate is distributed to heirs.
These two problems are related because any accounts that aren’t set up to go directly to your survivors will have to go into your estate. They are “locked up” there until the estate goes through the probate process. This can take months or even years. In the meantime, your family still needs to pay rent, and eat, and get through life. That’s going to be hard if they can’t access any funds.
In addition, the probate process costs money. Depending on the size of your estate and state law, the estate may have to hire a lawyer, and there are other costs. Keeping assets out of probate will decrease the cost of probating your estate.
How I Discovered Our Beneficiary Designation Mistakes
I’m in an estate planning class, and a few months ago, we were discussing beneficiary designations on bank accounts and retirement plans. My professor was telling a story about a client whose brother thought he had his substantial retirement assets set up to go to the siblings, but hadn’t. The funds went into his estate, and because of the size of his estate, there were taxes, and a lot of that money ended up going to the federal state governments instead of the siblings. Plus the general hassle and expense of having those assets go through probate when they would have gone directly to the beneficiaries if the paperwork had been set up correctly.
Because I’m easily distracted, I opened up my retirement accounts while watching class (I know, I know) and discovered that MY beneficiary designation wasn’t set up the way I wanted it to be. So I checked my husband’s accounts, and they were wrong, too. Obviously, we fixed those ASAP!
Then, we stopped by our bank and asked to verify our Payable on Death instructions. We discovered two problems: many of our joint accounts didn’t have survivorship on them, and most of our accounts didn’t even HAVE Payable on Death instructions! Seriously!
We have a somewhat complex situation, with a special needs kid. Having these beneficiary designations wrong would have not only been a huge hassle, but it also would have created some big problems.
How Could This Happen?
Well, I’d like to say that all of our accounts magically messed up. But that’s probably not true. The sad reality is that I just wasn’t keeping up with things as well as I thought I was.
We moved our retirement assets in 2020, and I’m guessing that we didn’t sign whatever needed to be signed then. Many of our bank accounts are decades old and I’m not sure we even thought about beneficiary designations in our 20s. (Though we should have.)
The biggest issue here is that I genuinely thought that we had things sorted out, and so I never checked.
Don’t be like me.
How To Make Sure This Doesn’t Happen To You
Thankfully, making sure that you have everything set up properly isn’t difficult. It might be a little time-consuming, but it isn’t difficult.
First, check every account to ensure things are set up the way you think they are. For some assets, you’ll have to check how it is held (titled), some assets you’ll have to check the beneficiary designation, and for some assets (like bank accounts) you can do both.
Then set up a system to check these beneficiary designations regularly. I’m going to start doing it when I do our net worth around the first of the year.
Lastly, remember to review your beneficiary designations whenever you have a life change: birth, death, marriage, divorce, etc.
As long as we’re here, let’s have a chat about secondary beneficiary designations. First, you need them. Second, think carefully about who you designate and any unintended consequences that might occur.
For example, let’s say Susie and Joe are married. They have each other as primary beneficiaries on everything. Then, they have their respective siblings as secondary beneficiaries. Susie and Joe get in a car accident. Susie dies instantly, and Joe inherits everything. But Joe dies from his injuries two months later. Everything Susie and Joe owned would end up with Joe’s siblings, and Susie’s family would get nothing. That’s probably not how they intended that to happen.
Just something to think about as you set these things up.
An accurate and well-thought-out beneficiary designation on every account may be the most important part of your estate plan. Please learn from my mistakes and check your beneficiary designations RIGHT NOW. Then set up a process to check them on a regular basis. Thank you. From me, and the people who will eventually survive you.
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