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Importance of Beneficiary Designations

By: Rajesh Jyotishi Email By: Rajesh Jyotishi
September 2010
Importance of Beneficiary Designations Many people forget they have insurance policies, annuities and retirement accounts that have stated beneficiary designations and forget to change them after marriages, divorces or after their initial beneficiaries have died.

I had an interesting yet sad situation happen last month. One of my clients to whom I had sold a life insurance policy 15 years ago was tragically killed in a car accident. At the time he had purchased his life insurance policy, he was very young, not married and had named his mother as the primary beneficiary and his sisters as secondary beneficiaries.

Since then, he had gotten married and also had a couple of children. He had never got around to changing his beneficiaries on his life insurance policy.

To whom do you think the life insurance company is going to pay the death benefits? The answer is the designated beneficiary on the policy. In this case, it is the mother, not the wife!

Many people forget they have insurance policies, annuities and retirement accounts that have stated beneficiary designations and forget to change them after marriages, divorces or after their initial beneficiaries have passed away.

Some of the common challenges of inappropriate beneficiary designations are:

1. Gift Taxes: If the inheritance is a sizeable one, say $1 million dollars, even if you out of the goodness of your heart want to share this with the other family members, you may incur gift taxes. Under current law, any gifts exceeding $13,000 from one person to another may use up your $1M lifetime gift tax allowance and may be subject to gift taxes.
2. The stated beneficiary may not want to share their inheritance. This has happened many times in cases of divorces, where the ex-spouse gets a huge settlement check and the current spouse and kids have been left out. This has also happened in the case of business owners who have buy-sell and key employee insurance.
3. Minors as Beneficiaries: Many people have children or grandchildren as their beneficiaries. Insurance companies cannot give large sums of money to minors. They have to appoint a trustee for the benefit of the child. This can create two possible problems. One, if the surviving family needs funds immediately, they may not be able to access them, since they are for the benefit of the child. Two, once the child turns age of majority (in Georgia it is 18), the child would have full access to his funds. If the child is not mature enough, the money may be squandered.

It is a good idea to review your beneficiary designations periodically to make sure they are in line with your current financial goals. While you are at it, you may also want to review your will and make any necessary revisions, if necessary. Your financial advisor can help!

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