The Employer's Legal Resource: Encourage Employees to Review Beneficiary Designations
One of the biggest (and no cost) favors an employer can do for employees is to encourage them to have their Beneficiary Designations on any life insurance (perhaps through the company) and retirement plans like a 401(k), traditional pension plan or IRA up to date and correct.
The beneficiary designation on file with the life insurance company, HR or custodian of the retirement plan determines who gets the money if an employee dies. It prevails over any trust or Will. If the holder of the money can figure out whom to pay based on the Beneficiary Designation on file, that's who gets the money.
For many employees, these are often their biggest assets. He or she may not have much money in the bank, much equity in a house, and be "upside down" on their car, but they do have money in their retirement plan and some life insurance through their employer.
The employee should spend a few minutes reviewing what the beneficiary form says. They vary widely. It's important to have secondary or contingent beneficiaries named. For example, sometimes a share for a beneficiary who dies before the employee flows down to the named beneficiary's children. Sometimes it is divided pro rata among the other surviving beneficiaries.
It's a good idea for the employee to keep a copy of the current beneficiary designation, just for their records and convenient memory.
People shop like crazy to save 5 cents on a gallon of gasoline but are often careless with an asset worth many thousands of dollars.
Estate planning lawyers and probate lawyers have all sorts of horror stories. Here are just two such examples:
Story #1. Fred and Ethel get married in their 50s (second marriage for both). Fred makes Ethel his beneficiary on a paid-up life insurance policy worth $200,000. Soon thereafter, they become estranged, but never get divorced. Fred is very close to his kids from his first marriage. He has no relationship with Ethel's children from her first marriage. Fred never changes his beneficiary designation, although nothing prevented him from doing so. 20 years later, Fred dies in March. Ethel dies in May. As a result, Ethel's kids split the $200,000 proceeds from Fred's life insurance.
Story #2. Mildred has a nice IRA that she rolled over from her 401(k) at work. She made her husband, John, her beneficiary, but did not name any contingent beneficiaries, even though they had three children together. John died first. Then Mildred died. Because no secondary/contingent beneficiaries were named on the Beneficiary Designation, a court probate proceeding was required, resulting in a few thousand dollars in otherwise unnecessary legal costs.
•Review and update the forms. No substitute for putting an eyeball on the form.
• Plan for contingent beneficiaries. What happens if someone dies? Some crazy order of deaths?
• Keep a copy to refer to and refresh the memory if there is one of those life changes, like a divorce, a death or someone falling out of your favor. You can always change it.
By Harry V. Rouse, HRouse@dsda.com