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When the ex-spouse inherits everything you’ve worked for

by Susan Wright | Contributor
Sep 23, 2021

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Even if you’ve saved and invested well throughout your life, you could be making one of the most common financial mistakes – but it’s one that could change everything for the people you love and care about.

What exactly is this blunder?

The answer is not keeping your retirement account and life insurance beneficiary designations up to date.

Imagine how the ones you love the most would feel if everything you worked for throughout your lifetime ended up going to an ex-spouse, a former business partner or other individuals who may have once been close to you but are now no longer in that capacity.

Here’s how you can prevent that from happening.

Why your beneficiary designations matter so much

The late actor James Dean was killed suddenly in an automobile accident at the age of just 24. Due to his good looks and “heart throb” persona, though, Dean was nevertheless a wealthy man at the time of his early passing.

Unfortunately, Dean passed away without having a will or any beneficiary designations in place. Therefore, under the law of “intestate succession,” his estranged father ended up inheriting all of Dean’s assets – even though he had abandoned James when he was just a child.

Because of his lack of planning, rather than millions of dollars going to the people that James Dean loved and cared about, all of his assets instead went to the biological father who he never really even knew.

Sadly, stories that are similar to this happen every day. Money and property pass to recipients who are no longer associated with the decedent – or worse yet, those are still connected in some way, but not in a financial sense – such as an ex-spouse or partner.

So, not only can the wrong beneficiary designation – or no beneficiary designation at all – divert assets to unintended individuals and entities, but it can also leave those who are counting on you for financial support with very little or nothing at all. And this could equate to long-term financial struggle for those whom you truly love and care about.

The assets of retirement accounts, bank accounts, brokerage accounts, and life insurance and annuity policies are typically paid or transferred upon the death of an owner to one or more designated beneficiaries – and many people are surprised to learn that beneficiary designations can actually control the distribution of these assets, regardless of the provisions of your will and/or trust.

With that in mind, financial matters can oftentimes go south if they are not properly planned for. Sometimes, for instance, a beneficiary will predecease the account owner, and the designation is never updated. This, in turn, can cause the assets to get tied up in probate.

In other cases, a beneficiary may actually be a former spouse. Depending on whether or not there are children from the marriage, life insurance coverage could be necessary purely from a financial standpoint. Typically, though, ex-spouses are no longer an account owner’s first choice for receiving large sums of money.

In still other instances, a beneficiary could be a minor and therefore is not eligible to inherit any assets outright. With this scenario, the assets – including life insurance death benefits – would instead be paid to a custodian of the funds. Typically, the custodian would be a surviving parent. However, if both of the minor’s parents are deceased, the custodian would be appointed by a court.

If the beneficiary has special needs and is receiving government-based financial support (such as Medicaid and/or SSI benefits), inheriting a large windfall could deem them ineligible for these benefits – and this could actually end up putting them in a worse financial situation than if they wouldn’t have received the inheritance at all.

Unfortunately, if a beneficiary is exposed to creditor and/or legal judgments, they may not be an ideal candidate for receiving the funds from life insurance or other types of accounts. The same holds true if your beneficiary is a spendthrift and will likely end up spending all of the money on frivolous items (often within a short period of time).

Still another situation can involve taxes. For instance, one “unintended beneficiary” could be Uncle Sam – primarily in the form of transfer and estate taxation – as well as federal, and possibly also state taxes. Working with a financial professional who is well-versed in estate transfer, then, is essential – even if you are not ultra-wealthy.

How long can it take for a beneficiary to receive assets?

The length of time that it takes for recipients to receive assets following an individual’s death can depend on several criteria, including how the assets are titled, whether or not there is a will, and whether there are beneficiaries named on various types of accounts. The time frame can also be dependent on whether or not the decedent’s estate has to go through the probate process.

Probate is the legal process in which a will is reviewed in order to determine whether or not it is valid. It also refers to the general administering of a deceased person’s will or the estate of a deceased individual who dies without having a will in place.

Many are surprised to learn that assets and property could still go through probate, even if the decedent had a will. In fact, the executor of an individual’s will is responsible for filing it with the probate court. (Note that different states may have differing rules for the timeframe of this filing after the individual passes away.)

Once the executor has paid off any of the debt and/or taxes that are owed by the deceased person, creditors will have a certain amount of time (usually one year) to make any claims against the estate for money that is owed to them.

Once these claims (if there are any), as well as any estate taxes that are due have been paid, the executor will seek authorization from the court to distribute the assets that are left. If there is no will in place, then the assets will be distributed according to state laws (and frequently the recipients are not the ones the decedent would have intended).

The laws of “intestate succession” – which refer to the order in which assets are passed – can differ, based on whether you are married or single, as well as if you do or do not have children. Typically, though, assets and property are split into “shares” for your loved ones, and will follow a particular order, such as:

  • Your surviving spouse
  • Children
  • Parents
  • Siblings
  • Aunts and uncles
  • Nieces and nephews
  • Distant relatives

Often, if there are no living relatives of a decedent, all of the assets and property will go to the state. In any case, probate can also be costly and time-consuming, which in turn can reduce the amount of assets that are ultimately paid out to the recipients. Expenses can include:

  • Attorney’s fees
  • Court costs
  • Filing fees
  • Certificate fees
  • Appraisal fees
  • Postage fees
  • Notary fees
  • Notifications (such as notifying heirs and posting public notices about the estate as required by law)

In all, the probate process could erode 15% or more of the estate’s value. It could also take up to a year (or longer) to settle the estate – time that the survivors must go without access to these assets.

But having beneficiaries named on various property and assets can help to avoid probate. In fact, generally speaking, any assets that have a named beneficiary will not have to go through this process – which includes most assets that are placed in trusts.

In addition, even if a named beneficiary conflicts with information that is stated in a will, the beneficiary designation will supersede. Therefore, if you have an updated will, assets could still end up in an unintended recipient’s hands if beneficiary designations are also not up to date.

Other methods of transferring assets

In some cases, assets may not allow for an actual beneficiaries to be listed, and in others, there may be alternate methods of transferring funds and property. These options could include:

  • ToD (transfer-on-death)
  • PoD (payable-on-death)
  • Asset titling
  • Trusts
  • Life insurance
  • Contingent beneficiaries

A transfer-on-death, or ToD, is a type of beneficiary designation that essentially “transfers” the ownership of stocks, bonds or other investment assets to a named individual (or individuals). ToDs are oftentimes used with personal investment accounts (retirement plans and IRAs).

PoD, or payable-on-death, is an arrangement that an individual makes with a bank, credit union or other financial institution to designate beneficiaries to their bank accounts and/or CDs (certificates of deposit). A PoD is easier to create (and maintain) than a will or a trust.

The way in which assets are titled can also help avoid probate as well as better ensure that the money and property is transferred to the intendent recipients. As an example, if you title property jointly “with right of survivorship,” then upon your death, the assets will automatically pass to the other joint tenant(s).

In some cases, setting up a trust is the preferred method of transferring assets. Going this route can also make the transaction more private because unlike going through the process of probate, there is no need to notify creditors or post notices.

There are many different types of trusts, so you could use these vehicles to better “customize” what it is that you are hoping to accomplish. For instance, some types of trusts are used for keeping assets out of a deceased person’s name for estate tax purposes. There are also strategies for setting up trusts that can benefit a favorite charity, while at the same time offering various tax incentives for you.

Life insurance can also offer you a way to transfer assets directly to one or more named beneficiaries. Often, all that is needed is the death certificate for the life insurance company to release the death benefit from the policy.

Depending on the insurance company, the money could be received in as little as one or two weeks. This means that final expenses (such as the cost of a funeral and burial) may be paid off quickly, as well as other debts, so that survivors do not have to endure financial hardship. As an added benefit, these funds are typically income tax-free to the recipients.

Even if your life insurance and other financial accounts have a named beneficiary, though, it is always a good idea to name one or more contingent beneficiaries, as well. That way, if the primary beneficiary predeceases the insured, the next recipient (or recipients) is already lined up, without having to make updates right away.

In many ways, having contingent beneficiaries named can offer you “double protection” that your estate will be distributed in a timely manner and that funds will go to their intended beneficiaries.

When and how often should beneficiary designations be updated?

Just like with an estate plan, your beneficiary designations need to be updated. Many financial professionals recommend reviewing them at least once per year, and even more often if you have experienced any type of major life change such as:

  • Marriage or divorce
  • Death of a spouse
  • Birth or adoption of a child or grandchild
  • Retirement
  • Purchase and/or sale of a home
  • Purchase and/or sale of a business
  • Death of your current beneficiary

In the same vein, many people also end up “unintentionally disinheriting” a child, grandchild or other loved one whose name is not listed on your policies or accounts. Therefore, in certain instances, a broad category of beneficiary could be used, rather than individuals’ names.

As an example, if you purchase life insurance with the purpose of leaving money to your grandchildren, rather than naming each grandchild separately in the policy, it could make more sense to simply state that “all of my grandchildren” are to receive the proceeds.

That way, if a new grandchild enters the family, they will not be unintentionally disinherited if their name is not added to the policy.

Similarly, not having proper beneficiary designations could lead to “unequal” inheritance. If, for instance, one child is to receive a family business, another could be named as the beneficiary of life insurance or other assets so that what they receive upon a parent’s passing is of a similar value.

Factors to consider when naming your beneficiaries

Deciding on your beneficiaries could take a considerable amount of thought. This can include determining who depends on you for financial support and would in turn have to reduce their standard of living if you were no longer here.

Some of the key factors to consider when choosing beneficiaries can include:

  • The intended purpose of the assets
  • Marital status
  • Whether your children (if applicable) are minors (and if so, who to name as the custodian)
  • Special needs of loved one
  • Spendthrift tendencies
  • Future financial goals (such as college funding for a child or grandchild)
  • Category of beneficiary (i.e., “all of my grandchildren” versus individually naming them)
  • Charitable organizations you’d like to donate to
  • Any restrictions on beneficiaries (i.e., some states that have community property laws may require that your spouse be named as the beneficiary, or they must sign a waiver in order to name someone else)
  • Contingent beneficiaries
  • Whether you have any trusts in place
  • Any taxes that may be due

Are all the pieces of your estate and financial plan up to date?

Beneficiaries can be individuals, entities, estates and charities. So, provided that you follow any account or insurance policy guidelines, as well as any federal and state laws, you can essentially name anyone of your choosing to receive your assets.

Are the beneficiary designations on your life insurance and financial accounts up to date? And if not, what would the consequences be to your survivors if the unexpected occurred sooner rather than later?

An Alliance America financial professional can help you go through your various assets and property and assist you with determining how beneficiaries could be named in order to best comply with your wishes.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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