The Basics Of Beneficiary Designations

Hi, Lisa. I have a 401(k) account with my employer and have named my wife as beneficiary if something happens to me. But what if she dies before me? Who would get the money?  Thank you. Dean.

Dear Dean,

You raise a very good question. Most retirement plans, life insurance policies, annuities and certain other types of accounts allow you to name who will receive the proceeds when you die by filling out a beneficiary designation form. And it is important that you do so. If you don’t properly complete the beneficiary designation form, that account may be subject to probate — the costly and time-consuming court proceeding I have harped about in previous columns — and end up in the wrong hands.

So what does properly completing a beneficiary designation form mean? Well, it means several things. First, you should name your primary beneficiary or beneficiaries. You can name one person (or an institution or trust) as sole beneficiary; or you can name more than one beneficiary and specify what percentage of the account each person will receive. You should also name “contingent” or secondary beneficiaries in case your primary beneficiary (in your case, Dean, this would be your wife) dies before you. If you fail to do so, you may once again find yourself in a probate court and your 401(k) may end up in the hands of an unintended person.   

Pay careful attention to the coordination of your beneficiary designations and other estate planning documents. Too often, beneficiary designations do not harmonize with a person’s will or revocable trust because they were filled out improperly or have not been updated. Also, be careful when naming a minor as a beneficiary. If not properly structured, such designations may necessitate a guardianship for the minor.

Beneficiary designations are not as simple as they may seem. Tax implications also come into play. So you are well-advised to consult with your financial planner as well as an attorney and/or tax advisor.

If any reader would like to ask me a legal question, post it on the Barrington Patch website or send your question to me at lehmanlawoffices@aol.com. 

Best Regards, 

Lisa

DISCLAIMER:  Please be aware that this column provides only legal information of a general nature and is not intended as legal advice for any person, group of persons, or entity. You must always consult with an attorney with respect to your particular legal situation and circumstances.