Wisconsin Law Blog

Date: 9/26/2008 5:32 PM

By DAVID PITT
AP Business Writer

DES MOINES, Iowa (AP) _ Financial planners say it happens all too frequently: a person dies unexpectedly leaving ex-spouses or relatives they haven’t seen in years large chunks of money because they hadn’t updated their retirement plans or life insurance policies.

It’s a problem that you can try to head off at the pass this open enrollment season. But be aware that for most insurance and retirement accounts, changes can be made any time and do not require you to wait for your annual benefits selection.

It’s important to keep beneficiary designations current because a lot is at stake. Collectively, the amount of money held in retirement accounts in the United States is large and growing.

The Employee Benefit Research Institute said IRA assets grew 12.5 percent to $4.75 trillion in 2007.

Private-sector defined contribution plans including 401(k) accounts held $3.5 trillion, and private-sector defined benefit plans held $2.33 trillion in 2007.

Many people may believe that an updated will is sufficient to take care of any financial issues left behind, but that’s not the case, said Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research, a division of Charles Schwab & Co. Inc.

Retirement plan assets and life insurance benefits generally go directly to the named beneficiaries, and those survivors likely will have their money before a will is processed in probate court.

Many people have multiple life insurance policies and retirement funds from different employers and forget to update beneficiaries. So, if you’ve divorced and your first wife is still the beneficiary on a life insurance policy, there could be a problem for other survivors who may be depending on the benefits.

“This is probably not one of those things that’s the top priority for most folks,” Spiegelman said.

He recommends reviewing beneficiary declarations on retirement accounts and insurance policies every two to three years. They also should be reviewed when major life changes occur such as a birth, death of a family member, a divorce or a move to another state.

Some advisers recommend an annual review to keep the policies and accounts as up-to-date as possible.

Accounts that may have beneficiary designations include individual retirement accounts — 401(k), 403(b), or 457. Self-employed accounts such as a Keogh or qualified retirement plan. Credit union plan accounts, disability insurance policies, life insurance policies and annuities also have beneficiary forms. Also think about beneficiaries for accounts at brokerages, he said.

As a practical matter, most married people will name their spouse as the primary beneficiary and their children as contingent beneficiaries if the primary isn’t still living.

Spouses have certain benefits when it comes to inheriting a retirement account. They can roll the money over into their own retirement account or keep it in a separate account and defer taking out any money until they turn 70½ — when they must take required minimum distributions. A spouse also has the option of taking the money out in distributions over his or her lifetime, taking advantage of the tax-deferred status of the account.

It’s important to note that federal law makes your spouse the default beneficiary on the retirement account through your employer such as a 401(k). Someone other than your spouse can be named the beneficiary only if you authorize it and your spouse signs a release form.

For unmarried people, parents, other family members, domestic partners or others close to them may be chosen as beneficiaries.

Failure to name beneficiaries means the money goes into your estate and becomes part of the probate process, which means the cash will be tied up in a court process and some of it will be lost to the expenses of the probate process.

Some people have made the mistake of naming their estate as the beneficiary, which again locks up the assets in court-managed probate.

In a few cases, an individual may want to name a trust as the beneficiary, which places the money in control of a trusted money manager. It’s an option if you believe the beneficiaries of your money may not have the skills to handle it.

Marvin Feldman, president and CEO of the Washington-based Life and Health Insurance Foundation for Education, a nonprofit group formed by insurance companies, said a trust might be important if you decide to leave the money to a minor child.

The trust would be named as the beneficiary of your money and the person you name to manage it, the trustee, would be responsible for distributing funds to your child in the way you establish in the trust documents.

Sometimes trustees are given some flexibility to make distribution decisions as needed but within parameters you establish.

Trusts may also be an option if you’re divorced with minor children and former spouse has custody of the children. A trust would ensure that the money you leave is used to support the child’s needs.

Copyright 2008 The Associated Press.