Update Your Beneficiary Designations – NOW!

Folks, I realize financial planners get a somewhat deserved bad-rap. After all, many are truly little more than investment counselors claiming they are “financial advisors” or “financial planners”.

This ticks me off actually. Don’t hold yourself out as a “Financial Planner” if you’re only doing investment management!  That hurts the people who need true financial planning.


A Need For Unbiased Financial Advice

Given that backdrop, it’s hard not to see why many Americans seek a safe-haven for financial planning guidance from other sources, like on a well-known website.  The thought is that a guy, or lady, writing on a reputable website must have been screened by…well, somebody, right? I mean, a website isn’t going to put their reputation at stake by just hiring anyone would they?  The person giving advice must know his or her stuff.   But…what if they don’t?


Where “Unbiased” Equals Bad Advice

Which brings me to my frustration at this blog post.   I invite you to leave my page and take a few minutes to click on the link. Read the article. It’s not long.  Read the comments even if you so want.   I’ll be here when you come back.


Okay, you’re back.  What jumped out at you??? Anything???   Forget the ethics involved in what the guy is wanting to do.  For this article, that is not my concern. I care about the functionality of what the guy, who asks the questions, is trying to accomplish.

Unfortunately, the answer guy, this Quentin Fottrell, hurt his readership with his answers.  He hurt them badly and if they don’t figure out why, he will have hurt the heirs of these people too.  Why?

Retirement Accounts Should NOT Transfer Via Your Will!

Because retirement accounts do not transfer via WILL!  Your WILL is completely silent on the disposition of your retirement account unless you make the unforgivable mistake of leaving your beneficiary designation form blank or Heaven Forbid, you name your “estate” as the beneficiary!  DO NOT DO THIS!

The guy seeking guidance even states he is thinking of naming his kids as beneficiaries on his life insurance. Thus he KNOWS what a beneficiary designation is.  Yet, he says his WILL is what is going to dictate who gets his money and how.  NO!

To force your heirs, be it your spouse or your children, into a probate court to settle an estate that holds retirement benefits is insane.  First of all, it’s a pain for your heirs that could have been easily avoided. Secondly, they lose ANY ability to stretch out the tax payments they’ll have to make on the retirement money.


Huge Taxable Distributions

I can hear the kids now thinking they got one over on their dad’s second wife by receiving an inheritance through Dad’s Will, via probate; “Thanks Dad!  We got the money and step-mom didn’t. HAHA!” Guess what? You’re also going to pay big taxes on those assets within a short period because when you inherit a retirement account via probate your ability to take distributions on YOUR life expectancy is forever gone.

The wonderful folks over at IRAhelp.com have a great article on this exact topic.

When death occurs before April 1st of the year after the account owner turned 70 ½ (this is called the required beginning date or RBD), the IRA must be paid out by the end of the fifth year after death – the 5-year rule. You have no required distributions each year; you just have to make sure the account is empty by the end of the fifth year.

In this case, if the death happened before the owner was taking his Required Minimum Distributions (RMD) the entirety of the IRA MUST be cashed out within 5 years.   That’s not so bad, right? Think again.  Say you’re making $150k a year as a single taxpayer.  Now you get a $200,000 IRA distribution. What does that $200,000 do to your tax bracket? You’re now going to lose well over a third of the amount to the Feds, never mind what your state taxes are.


Increase in Medicare Premiums

Oh, let’s say you’re on Medicare. What does that $200,000 distribution do to your Medicare Part B and D premiums the following year? Only increases them by nearly $300 a month, essentially a 300% increase!

Increase in Taxes on Social Security Benefits

Say you weren’t even working and were living on Social Security and had that $200,000 IRA distribution.  What does that do to your taxes on Social Security? Just makes 85% of your benefit taxable as ordinary income.

Retirement accounts are HUGE tax bombs in so many ways. To leave your retirement accounts to your estate so your WILL can deal with it, is horrible, HORRIBLE planning.  Ole Quentin should have seen this and discussed it accordingly.  But he didn’t.

Maybe he doesn’t know about this issue? Hardly. Most likely, because he writes a blog, he just doesn’t have enough space or time to answer each question as thoroughly as he’d like.  Still not acceptable though. Financial planning is a serious business and it’s the simple things that ruin the best laid plans. I’ve seen it time and again.





Social Security Survivor Benefits Not Addressed

Finally, the guy writes “(his) wife is not in the best of health and wouldn’t do well on her current Social Security award.” Guess what? She may not just keep her own “Social Security award.”  She may, and I’m willing to go on a limb here and say PROBABLY, take over the husbands benefit instead.

Social Security Survivor benefits work very, very differently than any other type of Social Security benefit.  See my post here for starters.

If Mr. has a Social Security benefit of $25,000 and Mrs. has a benefit of $12,500, when Mr. dies Mrs. loses her benefit but gets his.  So, now her benefit is what??? If you said $25,000, you are correct.

Does Quentin tell this guy that though? No!  And that piece of info may have a big impact on how the guy considers his estate planning, as it could add another $1,000 a month to the wife’s Social Security benefit.  It’s a hugely important piece of information to understand.


Social Security Survivor Benefits For Ex’s

By the way, if you’re the ex-wife of this guy, were married to him for more than 10 years and you are NOT remarried, did you know you are entitled to your ex’s Social Security benefits?  It would be well worth your time to contact your local office and say “Hey, I just read that I could qualify for a Social Security benefit on my ex’s record? Is that true?” And the SSA office will say “yes it is. We just need to compare your benefit to what you’d receive under his benefit and we will pay the GREATER of the two!”

Will your ex ever be notified? Nope.  Do you need to know his Social Security number? Be helpful but nope. As long as you were married  it’s worth checking with the Social Security office.  Shoot, even if your ex is still alive, again as long as you were married over 10 years and are not remarried, give the SSA a call. You may find a lucky break waiting for you.


Financial Planning Topics That Should Have Been Addressed

All of these issues should have been addressed by Quentin before he provided any sort of family counseling.  All the family counseling in the world is meaningless if the IRS gets a HUGE part of the pie to begin with.

Secondly, proper family counseling should be done only when all the facts are on the table.  In this case, many were left out and this poor gentleman, his wife, his ex-wife, his children AND his readers could pay a price.


For more ideas to help you with your financial planning please click here.


Be on the lookout for my new book “21 Reasons You NEED a Roth IRA!”

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Beneficiary Designations may be the most important aspect to ANY inheritance plan. Who gets your money when you die? I talk about this a lot in fact. Here, here and in other articles throughout my blog, like here.

So, it goes without saying that I am a beneficiary designation fiend.  It’s absolutely inexplicable to have not put designated beneficiaries on your IRAs, 401ks, 403Bs, annuities, life insurance etc.  In fact, you can put name designated beneficiaries on your bank accounts via a Payable On Death (POD) arrangement or your brokerage accounts via a Transfer on Death (TOD) arrangement.

The only reason you would not want to do this is, well, I don’t know. I suppose, maybe, you have a Will and want your Will to dictate terms of your assets upon your death.  By not naming beneficiaries your assets will go immediately to Probate Court where your Will will decide the disposition.

But why put your beneficiaries through that?  Just name them outright for Heaven’s sake!

I’m sure there are examples in which you should not name beneficiaries.  Let’s say that represents 5% of the population.  For the other 95% then what’s your excuse?

I’m going to share with you three REAL WORLD examples I just learned about from a webinar I attended how beneficiary designation mistakes cost people HUGE!

Widower Is Disinherited From Wife’s $900k+ Retirement Account

First, here is a case where a man married to his wife for nearly 20 years was disinherited from her nearly $1 million retirement account because she had named her sister beneficiary 4 years before she married!  24 years after naming her sister beneficiary she dies and guess who gets the money? The sister did!  Rightly or wrongly, if the decedent wanted her husband to get her money she should have just updated her beneficiary forms.

Children Disinherited From Dad’s Retirement Account By Dad’s Second Wife

Secondly, here are two widows. Each was married less than a year to their respective husbands when those husbands died.  One widow is denied survivor benefits under the ruling that because she wasn’t married for a year the company was not obligated to give her benefits.

Wife Not Eligible To Receive Husbands Retirement Benefits Because Married Less Than One Year

The other widow was granted benefits, overriding the beneficiary form the decedent had filled out naming his kids as beneficiaries!  Why? Because the court in this case said that because the company SPECIFICALLY doesn’t state in its retirement plan document that marriages MUST be over a year for the surviving spouse to receive the benefits, the surviving spouse MUST receive the benefits, even if the decedent named his kids!  Does this make any sense? Of course not. Yet, there it is. In black and white.  This is insanity!

Decedents Daughter Disinherited In Favor of Decedent’s Divorced Spouse

In this case, it’s a pretty open and shut case.  Husband named his wife beneficiary of his retirement account. Husband and wife divorce.  Husband does not change beneficiary designations and subsequently dies.  Plan pays out benefits to husband’s divorced wife, even though daughter of husband was still alive.

Daughter sues and loses due to the fact that the ex-wife was still named as  beneficiary.   Really nothing unusual about this one. Don’t want your ex to get your money, update your beneficiary designations.

Jointly-Owned Property Beneficiary Blues

This one actually affected my own family.  Husband and wife married for many years.  Husband dies early when kids were still tots.  Wife dies many years later when kids are grown and scattered throughout the country. One of the daughters named executrix needs to settle the estate.

Takes wife’s (her mom’s) death certificate to probate court to confirm she is deceased.  Needs probate court to grant her letters of authorization to settle the estate.  But probate court won’t proceed with the moving of jointly owned assets because while they can confirm the death certificate of the wife, how about the husband? Probate court requests copy of death certificate on husband(dad).

Well, he died 2 decades before when executrix was a young child. Executrix has no clue where that paperwork would be.

After many weeks of aggravation, constant paperwork shuffling and of course, fees,  the estate is finally settled. But that is time that is lost due to the unnecessary burden of the Jointly-Owned Property Blues.

When owner of a jointly-owned property dies, it’s time to revisit the ownership titling of those assets. It will make it MUCH easier on the person you want to settle your estate.

Moral of the story. Understand your beneficiary designations…and your account titling.  Think about it. Don’t just look at the statement in the mail and throw it aside and say to yourself “looks good.” Does it? What could possibly go wrong?

Well, as we’ve seen in the soap opera above, many, many things could.

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