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Planning For the Future

To Our Clients and Friends:

Most of us have more than enough to do. We’re on the go from early in the morning until well into the evening—six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow or the next day or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can sometimes be tragic. In this real life example, the ex-spouse collected $400,000 from Dad’s company savings and investment plan even though the ex had specifically waived any interest in the plan under the divorce agreement. Believing the divorce agreement was the last word on the subject, Dad failed to turn in the form to officially change the plan beneficiary from his ex to his daughter. He died seven years after the divorce. The company plan document stipulated that beneficiaries could only be changed by submitting the required form. The Supreme Court unanimously ruled that the beneficiary designation trumped the divorce agreement. So the ex got the $400,000. (We can only imagine that Dad was rolling over in his grave.)

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and a lot less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important take away points.

The first is that if you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method such as a will or divorce decree. The second point is that it’s important to keep your beneficiary designations up-to-date. Whether it is because of divorce or some other life changing event, beneficiary designations made years ago can easily become outdated.

One final thought regarding beneficiary designations, while you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.

If you have any questions about what we’ve discussed in this letter, please contact us.

Best regards,

Charles

Charles S. Smith, CPA
Partner, Williams Scarborough Smith Gray, LLP

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