Financially Speaking: The Final Curtain
Death is the one thing most people don’t talk about. Amazingly, over the years, I’ve heard people say “if I die,” as if it were an option. One of the last great quotes by Ben Franklin sums it up best: “that in this world, nothing is certain, except death and taxes.” We’ll leave taxes for another time. Although death is a morbid subject, you and your family should discuss it.
When you lose a loved one, chances are you have lost part of yourself. What makes it worse is when you have neglected to do estate planning. When was the last time you reviewed and updated your last will and testament? Do you even have one? Will you distribute all of your wealth equally? Will some of your children and grandchildren get more than others? These are questions we have asked our clients over the years.
Some assets pass outside of probate because they will go directly to someone, not your estate, by contract or operation of law. Start with something that is easy and you can do yourself, without any help. Review all of your bank accounts, life insurance policies, investments, and retirement accounts. Are all of your beneficiary designations the same? Chances are no, since life gets in the way.
Beneficiaries are considered contract law. A beneficiary is someone or an entity named in a document that receives your property at death. Life insurance, retirement accounts (IRA, 401(k), 403(b), etc.), and even your bank accounts can pass directly to a named beneficiary. Most people are aware that when they applied for life insurance or completed their retirement plan (IRA, 401(k), 403(b), etc.) application, they were asked to name a beneficiary. Generally, spouses will name each other while those who are single may name a friend, parent, or sibling. This is called a primary beneficiary.
But what happens if the person you name as the primary beneficiary dies before you? Who gets the money? If you name a contingent (secondary) beneficiary, that person(s) will receive the proceeds. It seems simple, but it may not be what you wanted. Suppose you have three children and name them as contingent beneficiaries, each receiving one-third. What happens if one of your children dies before you? Well, the money will be split between the two remaining children equally unless you checked the box, “Per Stirpes.” Per Stirpes is Latin for “by branch.” Using the above example, if you named your children equally per stirpes, then if your child dies before you, their children, your grandchildren, will receive their share.
If you don’t name a contingent beneficiary, then the proceeds will be distributed by the terms of your last will and testament and become part of your probate estate.
One of the problems we’ve seen many times is that their beneficiary designation is out of date. How does it happen? One changes jobs, and the beneficiary for the new group life insurance and retirement plan is different from what was designated in your prior job. When you change jobs, we discuss rolling over your retirement plan into an IRA or into the new retirement plan. This will help minimize any confusion or mistakes and keep all of your beneficiaries consistent. There are those out there who change jobs every couple of years. We have seen some with three, four, or more retirement plans, and none of the beneficiary designations are the same. Maybe in their first job they name their parents. Maybe the next job, they name their friend or fiancé. Their next job they name their new bride but never change the prior beneficiary. As crazy as that seems, it happens.
Back in the mid-1990s, I received a call from a client’s spouse letting me know that her husband died. She wanted to know how much life insurance he had. I didn’t recognize her name and said I would check his file. These were the days when we had paper files. I spoke with her and said I couldn’t release the information to her since she was not the named beneficiary. What amazed me more than anything was not how upset she was but how fast she had her attorney call me. Her attorney called me about 10 minutes later demanding the information of the beneficiary’s name. I said this was contract law and I could not tell him anything except his client was not the beneficiary. I called the beneficiary, who happened to be his first wife. When I said I had just received a call letting me know her ex-husband died, she said that was great and she couldn’t be happier. She proceeded to call him every name under the sun. When she finished, I said I was calling to let her know she was the beneficiary of a very large life insurance policy. It was amazing how quickly she said he really wasn’t such a bad guy. So, if you are like approximately 50% of our country, please check your beneficiary to make sure your ex doesn’t receive the proceeds of your life insurance or investments if that is not your intention.
If you have non-retirement investments or bank accounts, you can still name a beneficiary. If you have a joint account, the money will flow to the surviving owner. If you open an individual account, you can title it Transfer on Death (TOD), which is also known as payable on death (POD), allowing the account owner to name a beneficiary. TOD accounts are generally used for investment accounts like stocks, bonds, mutual funds, and brokerage accounts. POD accounts are used for bank accounts.
Next, check your real estate holdings. Most couples will title their homes (including shore properties) in both names with rights of survivorship, which will pass directly to the surviving owner. Chances are if you check the title to your real estate, you will see “JTWROS” after your names, which means joint tenants with rights of survivorship. The property will pass by operation of law.
You can check all of these beneficiary designations and titles without the help of an attorney. Once all of your beneficiary designations are the same or the way you want, I do recommend consulting with an estate planning attorney. They will help make sure the balance of your estate is in good order.
Death is something you should be discussing now so you can eliminate or minimize mistakes. In 1976, Blue Oyster Cult released the song, “(Don’t Fear) The Reaper.” Maybe they knew that death is something we all face. Or perhaps they just needed a little more cowbell.
Now that we discussed that we are all going to die, grab your chair, book, and favorite beverage and head to the beach. Live a little.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is the former President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc.. Securities are offered through Commonwealth Financial Network®, member FINRA/SIPC. Fred may be contacted at 800-647-0762, by e-mail at freddunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342.
Advisory services offered through Planning Directions, Inc., a Registered Investment Adviser, are separate and unrelated to Commonwealth.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.
