A beneficiary is the one you have chosen to receive an asset upon your death. It is common to find beneficiary designations in life insurance, retirement plans and some investment and bank accounts. Making certain the beneficiary is stated correctly is of vital importance and they should be reviewed periodically.
With regard to life insurance, beneficiaries can be individuals (such as a spouse, children, siblings or parents), charities or a business or business partner. Lately, we have become aware of several instances where beneficiaries were designated at the time life insurance was purchased. The policy was tucked away and then it was never updated. Beneficiary designations should be reviewed at periodic intervals as well as anytime there is a change in marital status, children are born or become adults, business circumstances change, etc.
All too often, we hear that a couple divorces and the ex-spouses re-marry. Beneficiaries aren’t changed, one of the ex-spouses passes away and the insurance proceeds go to the ex-spouse rather than to the current spouse or children.
In one particular situation, the insured named his brother as the beneficiary. As years went by, the insured had children and both children are now adults. The insured recently passed away and it wasn’t until then that the sibling learned he was still the beneficiary named on the policy. He felt the proceeds should go to the insured’s children rather than to him. Could the sibling (the children’s uncle) simply receive the life insurance proceeds and then pay it to the children? Perhaps, but life insurance proceeds are typically exempt from income tax to the beneficiary. They may, however, be treated taxable if he were to pay the proceeds to the children. Could the insurance company be convinced to pay the proceeds to the children rather than the beneficiary named in the policy? Maybe, but this could be an extremely uphill battle that may never be won.
Avoid problems and after-the-fact tensions by reviewing your policies and estate plan regularly. Making a beneficiary change is a very simple matter of filling out a change of beneficiary form and submitting it to the insurance company. Of course, we highly recommend that any designation or change of beneficiary be done in consultation with your estate-planning attorney. Incorrectly naming a beneficiary can be just as dangerous and costly as failing to update the designation at all.