Financially Speaking: Beneficiary Designations Supersede Other Instructions
By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management Advisor®A
Accredited Investment Fiduciary
Last week, I shared information about the importance of knowing how to update your beneficiary designations. While the subject sounds simple and most times is, there is potential for things to go wrong. And when they do, it can be bad in a big way.
Beneficiary designations are specified on a retirement account or life insurance policy and supersede other instructions such as those that may have been put forth in a will or a trust, but may not supersede the law. That means that if your will or trust says one thing and your life insurance policy or retirement account specifies something different, the life insurance company or custodian of the account is bound to pay out per the beneficiary designation. For example, let’s say you have a life insurance policy that was established when you were young. Your parents are the named beneficiaries. You’ve since married and have kids. You and your wife create a will or a trust that specifies how assets will be transferred to each other and then to your kids. You didn’t update the beneficiary on the life insurance policy because you thought the new will or trust took care of it all. You pass away. The life insurance proceeds will pay out to your parents because beneficiary designations supersede your other instructions, even in a will or a trust.
I heard of a case once where a man had a life insurance policy that named his brother as the beneficiary. He didn’t get around to updating the beneficiary to his wife after getting married. They were building their dream house together, financed with a mortgage. He fell from the roof of the structure, tragically losing his life. Proceeds from the policy were paid to the named beneficiary, his brother. His wife was left with the incomplete house and mortgage obligation, losing her husband and the means to pay for the home.
Twenty-six states, Wisconsin being one of them, have adopted revocation upon divorce laws. Essentially, this means that if you remain as the beneficiary on a life insurance policy or retirement account as an ex-spouse, upon death of the insured or retirement account owner, the statute revokes you as the beneficiary and proceeds on down the list to contingent beneficiaries or next of kin. You may read the statute for yourself at https://docs.legis.wisconsin.gov/statutes/statutes/854/15, section 854.15.
I suppose the spirit of the law was intended for good reason and in most cases serves the purpose of redirecting an oversight, in that upon divorce, one could simply forget to update and remove an ex-spouse as a beneficiary. However, what if you were unaware of the statute and you are the primary income source for your children. You want your ex-spouse, who is the mother or father of your young son and daughter, to remain beneficiary of your life insurance contract. This could pose a problem if say, the contingent beneficiary was your brother or sister. Consult with a qualified professional for advice in complex situations such as this.
Life insurance policies and retirement accounts are often big-dollar items for big-dollar purposes. Be sure you are clear on how your assets will transfer upon your death. Beneficiary designations supersede your other instructions but may not supersede the law.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.