The Importance of Keeping Your Retirement and Life Insurance Beneficiaries Up-to-Date (Especially After Divorce)

The Importance of Keeping Your Retirement and Life Insurance Beneficiaries Up-to-Date (Especially After Divorce)

If you’ve been working for a while, there’s a good chance your retirement accounts (including 401Ks, IRAs, etc.) are among your biggest assets. Your life insurance policy, be it through work or otherwise, is also likely several times your annual salary. By keeping your beneficiaries on these accounts and policies up-to-date, you can see to it that some of your most valuable assets pass to your loved ones without going through probate or—even worse—becoming the subject of litigation.

Keeping these beneficiary designations updated is especially important if you’ve been through a divorce. Why? Because North Carolina and federal courts have usually said a beneficiary designation controls even if your separation agreement/divorce decree explicitly says your ex-spouse has no right to your retirement accounts/life insurance—and if your ex-spouse is still listed as the beneficiary when you die, your intended beneficiaries may be left to duke it out with your ex in court. Even if your intended beneficiaries win, they’ll likely incur substantial legal fees in the process.

The good news is that updating your beneficiaries is free and relatively easy—just contact the custodian, plan administrator, or life insurer. It’s a good idea to review your beneficiary designations every year, like in January or as you’re getting ready to file your tax return.

Who to Name as a Beneficiary

Your beneficiary can be a spouse or relative, but it doesn’t have to be (at least in North Carolina and other non-community property states)—you can also name a friend or a charity. (Note: If you’re naming a charity, you should contact the charity for any required forms and instructions.) You should also name at least one alternate beneficiary in case your primary beneficiary passes away before (or at the same time as) you.

You should NOT name a minor as a beneficiary of a life insurance policy or retirement account, at least without first talking with an estate planning attorney. If you name a minor and die before the minor reaches adulthood, a court-ordered guardian may be appointed and charged with making payout decisions (possibly even if the minor’s parents are still alive and caring for the minor). If you want a minor to benefit from the plan or policy, you should contact an estate planning attorney about setting up a trust to receive the funds; this will allow you to choose the trustee and specify payout instructions.

It’s also not a good idea to name your estate as beneficiary; doing so needlessly exposes the proceeds to claims by your creditors and increases probate costs.

Since retirement accounts and life insurance policies are likely a big part of your estate, you should make sure to coordinate your beneficiary designations with the rest of your estate plan. Just like adding someone to your bank account, naming someone as a retirement or life insurance beneficiary has the ability to throw off the balance of your estate plan if not considered as part of the bigger picture.

If you have any questions, please post a comment below or send me a message here.

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