Fun fact! The designated beneficiary listed on your accounts, in most cases, trumps who is listed as an heir in your will. Also, your spouse won’t automatically inherit all your accounts unless they are designated as the beneficiary. Let that sink in for a minute. When’s the last time you updated your beneficiaries on your accounts? If you’ve gotten married (or have gotten divorced), or if you’re not sure who you listed as a beneficiary when you opened an account up 7 years ago, take ten minutes to review who your beneficiaries are.
Why is it important to have updated beneficiaries?
Before Mr. Moneyaire and I got married my parents were the beneficiaries on all my accounts, including my first 401k. I set it up that way because I figured that if I passed, I’d want to “pay back” my parents for helping me pay for college and raising me. After Mr. Moneyaire and I got married, I changed him to my primary beneficiary. But, it wasn’t until a few years into being married that I got around to updating my beneficiaries. I just wasn’t aware, at the time, that I should do that. It didn’t dawn on me.
A hypothetical on beneficiaries
Let’s fast forward 15 years and I still hadn’t changed the beneficiaries on my old 401K. I unfortunately pass leaving Mr. Moneyaire and Baby Moneyaire as my heirs in my will. I had been diligently saving and investing into that 401k. It’s grown in to a sizeable six figure sum. If I had still listed my parents as a beneficiary and I pass, Mr. Moneyaire could be in a tough situation. My parents would be the rightful heirs if they are listed as the beneficiaries on my old 401k. Even if I have a will and trust in place saying Mr. Moneyaire should inherit everything.
If you’re married, you might assume your spouse would inherit all your assets upon your death. That will be the case if your spouse is listed as the beneficiary on all your account assets. If for example, your parents (or an ex) are listed as the beneficiary of your old 401k from 3 jobs ago, the listed beneficiary would get that asset even if you have an updated will & trust.
“No problem, my ex would do the right thing,” said no one ever.
You might think, “no problem” my ex or my parents would “do the right thing.” Do you think your ex would do the “right thing” and return money to a current spouse? What if you had your parents listed as your beneficiaries, but they had already passed? Depending on which state you live in, those assets could be passed on to their heirs. It could become a huge nightmare for a spouse who is not only grieving a loss but now also might lose significant retirement assets.
If you haven’t listed any beneficiaries AND you don’t have a will & trust your estate will go into probate. Probate is basically when the state government takes over settling your estate. In probate a court or judge will use laws in place to pass on your estate to whom they find to be your heirs. This could be a very time consuming process and expensive if heirs have to hire lawyers.
Take a few minutes
This spring, check in on your accounts and make sure your beneficiaries are all up- to-date. I know it can be a hassle to login to your accounts just to check for something like a beneficiary. Make a list of your accounts and write in who your beneficiaries are as you update them. Then you’ll have a document you can refer to in the future.
If you need some extra motivation to check up on your listed beneficiaries, check out this ChooseFI podcast that details the frustration one woman faced when her husband passed in an accident. Amy, lost her husband and faced numerous financial challenges after her husband passed. This primarily happened because her husband never got around to designating her as co-owner or as a beneficiary on his account they both used as a joint account. She details the hurdles and eventually how she had to split her husband’s estate with her in-laws. Ouch. Sometimes it’s the little things we do or don’t do that can have big consequences down the road.
Cheers!
Mrs. Moneyaire
