Careful planning for life insurance and retirement accounts (IRAs, 401Ks) can be undone by beneficiary designations gone wrong.
As a real-world example, father purchased life insurance on his own life, with his son as the beneficiary. When the son died unexpectedly, father attempted to change the beneficiary to his grandson. Forms were submitted to the insurance company but one of the forms was not accepted. The insurance company sent a letter to the father that further action was needed. Unfortunately, the father did not respond and died shortly later. As a result, the life insurance intended for the grandson instead had to be probated. The grandson ended up with only a small share of the insurance money.
In another example, a grandfather wanted to divide a large retirement account among several grandchildren. When the grandfather fell ill, a family member acting under a power of attorney looked up the policy online and could see that a beneficiary designation was “on file.” Wisely, they called to confirm and found out the beneficiaries had not been updated. A new change of beneficiary form was submitted but did not include a spousal waiver required in California as a community property state. The retirement account ended up in a probate of the grandfather’s estate. The grand
children ultimately received their shares, but the money could not be rolled over into inherited IRA accounts to defer the income taxes.
Other ways a beneficiary designation can go wrong include failure to update the beneficiary after divorce. Under California law, in most cases, when there has been a divorce, the former spouse won’t receive the distribution. But if there is no back-up beneficiary named, the money could end up in a probate. And the law does not help in case of a pending divorce. Until there is a Court order finalizing the divorce, the ex-spouse remains entitled to receive the money. Nor is there any recourse in the case of nonmarried couples if a partner is named as a beneficiary and no change of beneficiary is submitted after the relationship ends.
The lesson is to make sure a beneficiary designation is on file with the insurance company or the administrator of the retirement account, and be sure the beneficiary designation is up to date.
Lisa C. Alexander, Esq.
JAKLE, ALEXANDER &
PATTON, LLP
2001 Wilshire Blvd., Suite 420
Santa Monica, CA 90403
Main Line: 310-395-6555
Direct Line: 310-656-4310