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Northwest OH Legal Blog

Thursday, October 27, 2016

Beneficiary Designation Review Time

            As practitioners, we encourage plan participants, trustees and plan administrators to constantly spread the message that beneficiary designation forms should be reviewed annually and updated to make it perfectly clear who should inherit pension plan annuities, 401(k) balances and even death benefits.  We advise that plan sponsors place written reminders on plan websites, quarterly statements and communications’ materials mailed annually in addition to announcements made during enrollment and union meetings.  But it seems that, despite our best efforts to remind participants to review and when necessary, change who they name as beneficiaries on their retirement accounts, life insurance policies and pension plans, they either never fill out forms, forget to update forms when their lives change or don’t get the proper signatures on their forms to begin with.

            So why does it really matter whether these beneficiary designations are ever completed or updated after a marriage, divorce or other life-changing event?  It matters for several reasons actually.  Primarily, if participants do not complete any beneficiary designation, the plan administrator must follow the written rules of the retirement plan or group life insurance policy and designate the “default” beneficiary as the one who will receive the assets upon the participant’s death.  Many times this default beneficiary is the participant’s spouse and if no spouse exists, then the participant’s children or parents.  In any event, the choice of beneficiary often reverts to the plan’s control when the participant neglects to properly complete or update their forms. In a regulatory environment where the Internal Revenue Service and Department of Labor give so little discretion to plan participants over their own benefits, it is unfortunate that participants sacrifice such important life choices to written plan defaults.

            But what about participants who fully complete their forms initially and fail to update them when they marry or remarry or have children?  In that case, the choice of beneficiary made on the initial form is often a binding decision, regardless of other intentions that a participant may have.   And what is considered a “properly” completed designation form anyway?  For one thing, a participant must be sure to sign and date their beneficiary form and be sure that all of the percentages assigned to beneficiaries add up to 100%.   Furthermore, If a participant is  married and selects someone besides his/her spouse as a beneficiary, the spouse must acknowledge, in writing, that they are waiving their full benefit by signing the beneficiary waiver provision in front of a notary public or a  plan official. And if a participant names a minor child as a beneficiary, retirement plans often require a guardian, trust, or trustee to be named as beneficiary to provide competent management of the proceeds for that child.  Many participants name their parents and forget to change the designations when those parents pre-decease them. All of these instances can affect the final distribution of a participant’s benefit after their death.

            One of the worst circumstances that occur is when a participant forgets that he/she is eligible for several benefit plans and group life insurance policies and neglects to complete a beneficiary form for each of these benefits. There is no such thing as a “catch-all” beneficiary form unless every benefit plan and beneficiary designation is separately listed on that form!  When this happens, spouses and children often are unaware that such plans even exist and therefore, fail to ask about their right to these benefits when a participant dies. Unnecessary conflict and confusion often arise in these situations.

            So what is the best approach for participants to undertake to protect and formalize their intentions when transferring their benefit plan rights and balances when they die?

  1. A participant should make a list of every formal benefit plan title and group life insurance policy that they have rights to or balances in along with a copy of the actual corresponding beneficiary form executed.
  2. If no copies of the forms are readily available, a participant should have a record of the chosen beneficiaries and corresponding percentages of each beneficiary for each plan.
  3. Each plan must have its own form and its own designated beneficiaries (adding up to 100%) along with any properly executed waivers if a spouse is not the sole beneficiary.
  4. If a participant is missing a beneficiary form or beneficiary list for any plan, it is wise to contact the plan’s administrator to complete a new form or ask for a copy of the form already on file to verify that it is current.
  5. The list with the plan names and beneficiaries should be reviewed annually, not only by the participant but also by a participant’s spouse or significant other, to be sure that someone besides the participant is aware of the wishes of the participant.
  6. Beneficiary designations should be kept in a secure place with other important documents, either in a safety deposit box, home safe or an attorney’s office. Never assume that documents kept at work or on a work computer are safe and retrievable at any time!

            When these beneficiary designations are completed properly and reviewed at least annually, benefits avoid not only probate and unnecessary taxes; confusion is also avoided and the true intentions of participants are formalized and carried out.   By following these simple pieces of advice, inheritable assets are directed where they were meant to land.

 


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With offices in Toledo and Lima, OH Allotta Farley Co., L.P.A. serves clients throughout northwest OH with various legal matters. Areas of service include Allen County, Ashland County, Auglaize County, Crawford County, Defiance County, Erie County, Fulton County, Hancock County, Hardin County, Henry County, Huron County, Lucas County, Marion County, Mercer County, Morrow County, Ottawa County, Paulding County, Putnam County, Richland County, Sandusky County, Seneca County, Van Wert County, Williams County, Wood County, Wyandot County.

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