The Importance of Beneficiary Forms

Last will and testament text on paper Gilbert Law AZDid you know that a beneficiary form, such as life insurance beneficiary form, supersedes beneficiaries who are named in someone’s will? Are you surprised?

Recently I attended a seminar where 5 out of 6 people thought the exact opposite-that a will supersedes a beneficiary form. One attendee commented, “That’s not intuitive. I thought a will trumped everything.”

Unfortunately many people make the same mistake.

Will my ex-spouse get my IRA?

Possibly. If you did not update your IRA beneficiary form to name a new beneficiary and you die, the beneficiary form naming your now ex-spouse will control. He or she will receive the money.

What if I have a beneficiary form that names my “estate” as the beneficiary?

Naming the estate as the beneficiary of any asset is generally not advised. First, it likely means there now has to be a costly and time consuming probate. Second, many people make a mistake as to what the result will be.

A Yahoo! article last month told the story of a man who wanted to leave his IRA to his children. Unfortunately, he filled out his beneficiary form incorrectly naming his “estate” as the beneficiary. His $400k IRA was then distributed to his wife of two months through the probate process, and his children received nothing. This also caused tax problems as there are different distribution and tax rules for IRA’s that are left to an estate.

Won’t my spouse automatically receive my life insurance because we are a community property state?

No. The life insurance will be paid out to whoever is listed on the beneficiary form. However, the surviving spouse may have a community property interest in the life insurance if community property funds were used to pay for the insurance. To make this claim, however, the surviving spouse has to litigate against the beneficiary named on the form.

What can I do?

  • Make sure you are updating your beneficiary forms after each life event: birth, death, divorce, marriage, etc.
  • Name at least one back-up beneficiary on each form.
  • Take into account monies you leave to family outside of the probate process (which is controlled by your will) if you goal is to have equal monies distributed between your beneficiaries.
  • Meet with a proactive estate planning attorney who can advise you and help you structure your estate to meet your goals including avoiding probate.

A little work up front can prevent frustration and court costs on the backend and ensure your goals are met.

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