The Importance of Beneficiary and Contingent Beneficiary Designations for IRAs, 401ks, Life Insurance Policies and Annuities

By: Anthony J. Enea, Esq.

Unfortunately, all too often the appropriate completion of beneficiary designation forms for IRAs, 401ks, Life Insurance Policies and Annuities are given insufficient attention by the account and/or policy owner. The beneficiary designation form should not only be accurately completed at the time the accoun t or policy is opened, but, should be regularly reviewed as one ages to reflect one's wishes as well as any changes in circumstance relevant to a named beneficiary, such as, age, infirmity and/or death.

Recently, a single client without any children in her late 50's passed away. To the surprise of her siblings said client had never updated the beneficiary designation on her employer retirement plan for 35 years, which still had her mother, a 85 years old in failing health and a nursing home resident, as the named beneficiary. Unfortunately, this resulted in unnecessary income tax issues and other complications for the mother.

It is important to understand that the beneficiary designation made for an account or policy supersede one's Last Will and Testament and/or Trust. The individual(s) and or entity (i.e. Trust) named as the beneficiary on the account and/or policy will receive the account and/or policy upon the account/policy owners demise. Your Last Will or Trust will not override the beneficiary designation on the account and/or policy and upon your demise it will pass by operation of law to the named beneficiary(ies) and/or contingent beneficiaries in the event the primary named beneficiary is not surviving. These accounts and/or policies with named beneficiaries are not probate assets and are not disposed by one's Last Will.

One common area of neglect in the completion of the beneficiary designation form is failing to specify whether the beneficiary's share is to be distributed to his or her heirs in the event that he or she predeceases the insured. For example, you named your children Tom and Mary as the beneficiaries of your IRA, but you did not specify on the designation form whether it was a per stirpes (latin for "per branch") beneficiary designation. If either Tom and/or Mary do not survive and there is not a "per stirpes" designation, their share would not go to their surviving children (your grandchildren), but to your surviving child. Thus, when naming children as beneficiaries of your IRA, 401k, Life Insurance or annuity policy it is important to decide whether they are to be "per stirpes" beneficiaries.

One other error that is often made when completing a beneficiary designation form is the failure to name both primary and contingent named beneficiaries. Most often one will name a spouse and/or child as the primary beneficiary, but, then neglect to name a contingent or alternative beneficiary in the event the primary beneficiary is not surviving.

If a contingent beneficiary is not named and the primary beneficiary is deceased, the account and/or policy will be paid to the estate of the account owner. Thus, necessitating the probate of the account and/or policy/owner's Last Will if he or she has one, and or the commencement of an Administration proceeding if there is no Last Will. In an Administration proceeding the monies are distributed to one's heirs as per the laws of intestacy and virtually anyone can apply to be the administrator of one's estate. This typically is not a desirable result.

As if the costs, legal fees and delays of the Probate and/or Administration Proceeding as well as the possibility that the account or policy will be distributed to someone not intended by the account or policy owner was not enough of a detrimental unintended consequence, the failure to name a contingent beneficiary will also result in the IRA, 401K, Annuity and/ or life insurance policy pay out being subject to the claims of the decedent's creditors, including, Medicaid if he or she received Medicaid benefits before his or her death, even though IRAs, 401ks and other qualified retirement monies are generally insulated against creditors' claims.

The above stated clearly illustrates the importance of consulting with an estate and elder law planning professional to ensure that one's beneficiary designation are appropriately and correctly completed.