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The Dangers of Making Beneficiary Designation Mistakes · The Wealth Cafe

• 0:15
  Hi everyone, welcome back to another episode of the Wealth Cafe.
• 0:18
  I'm Caroline Tannis, your host, lead financial advisor, and founder of Tannis Financial Group, and I want to thank you for being here today.
• 0:25
  And to kick off this episode, we're gonna start with a real story.
• 0:28
  Now, some of the details have been changed to protect privacy, but the core of this situation has been documented in court records and happened to families across the country.
• 0:37
  Now, in this situation, a doctor has passed away.
• 0:40
  He has a comprehensive estate plan, and it was a will, a trust, and they were all thoughtfully designed to take care of his family.
• 0:46
  His estate was worth$1.2 million, and his family spent seven years in legal proceedings after he passed.
• 0:53
  They were fighting over it, paying legal fees, losing time, money, and their relationships were weathering.
• 0:59
  And this wasn't because his will was unclear, but because one form on one account had never been updated.
• 1:06
  And that one form legally overrode everything else that he had put together.
• 1:10
  Now, the Supreme Court actually ruled on a case like this in 2001.
• 1:14
  A divorced spouse was entitled to life insurance proceeds because the beneficiary form was never updated after the divorce, even though the decedent's intent was clearly otherwise, even though the state law would have revoked the designation.
• 1:29
  The form that's what controlled it.
• 1:31
  The ruling still stands to this day.
• 1:33
  And here is the rule I want to carry through the rest of this episode above everything else.
• 1:38
  Beneficiary designations override your will.
• 1:41
  This is a majority of the time.
• 1:43
  There are very few, if any, exceptions to this rule.
• 1:47
  Now, this applies to especially your retirement accounts.
• 1:50
  Your 401k, your IRA, 403B, 457, Roth IRA, you name it.
• 1:56
  This could be your life insurance policies, annuities, your payable on death bank accounts, and your transfer on death investment accounts.
• 2:03
  Every one of those assets passes directly to the person that you named on the beneficiary designation form, regardless of when you filled it out.
• 2:12
  This is also regardless of whether that relationship still exists and regardless of what your will says.
• 2:19
  Yeah, you heard that one right.
• 2:20
  Your will does not control those assets.
• 2:23
  The form that is what does.
• 2:25
  So let's say you got divorced and you never updated your 401k beneficiary.
• 2:29
  That means your ex-spouse could legally inherit that account.
• 2:33
  If you named your mother, for example, as primary beneficiary 15 years ago and she unfortunately has passed away before you, you never named a contingent beneficiary.
• 2:43
  Now that means that account is going to default to your estate and it goes through probate.
• 2:48
  If you named any minor children directly, a court is going to come in and appoint a guardian to manage the money until that child turns 18.
• 2:55
  And this might not be the person that you would have chosen to manage this money for them.
• 3:00
  Now, this is not a hypothetical risk for careless people.
• 3:03
  This is a document, well-researched problem that shows up in the estates of sophisticated, wealthy, well-intentioned people, just like you and me.
• 3:13
  Today we are making sure though this doesn't happen to you.
• 3:16
  So let's go over a complete inventory because I want you to walk away from this episode knowing exactly which accounts you need to review.
• 3:25
  Now, beneficiary designations control all retirement accounts at every custodian.
• 3:31
  So you need to make sure you're checking in with all of them and updating.
• 3:34
  401ks, your IRAs, Roth, 403B, 457, SEP IRAs, simple IRAs, pension with also survivor benefit elections.
• 3:43
  All life insurance policies, whether it's term, whole life, universal, need to be updated, as well as any annuities that you have.
• 3:49
  Any bank account with a payable on death designation also needs to get updated, as well as any investment or brokerage account with a transfer on death designation.
• 3:59
  Now, for the women in this audience, this is not a peripheral slice of your estate.
• 4:03
  For many high net worth women, retirement accounts and life insurance represent a majority of your transferable wealth.
• 4:11
  Now, these are assets that matter the most and they are controlled entirely by one single form, rarely by your will, and also not by your trust, not by anything your estate attorney carefully drafted.
• 4:25
  Beneficiaries could supersede all of this.
• 4:28
  Let me walk you through five of the most common mistakes I see, name them specifically, and make sure that this is an actionable episode for you and you know exactly what to do when you're done listening.
• 4:38
  Mistake number one is that you never update after a major life event has occurred.
• 4:42
  Now, this is one of the most common and also most costly mistakes that I see.
• 4:46
  This could be divorce, remarriage, death of one of your named beneficiaries, or the birth of a child or grandchild.
• 4:52
  Every one of these events creates a potential mismatch between who you intended to benefit and who the form currently names.
• 5:01
  The form does not update itself.
• 5:03
  It's not an automatic thing.
• 5:04
  You have to go in and do it.
• 5:05
  And as I mentioned, the Supreme Court has confirmed in multiple cases at this point that regardless, the form controls the circumstances.
• 5:13
  If you have experienced any of these life events since you last looked at your beneficiary designations, you have a gap that needs to be closed, and this is your sign to do so.
• 5:23
  Mistake number two is naming any minor beneficiary children directly.
• 5:27
  If you name a minor child as a beneficiary of a retirement account or life insurance policy, that child cannot legally receive the assets directly.
• 5:35
  A court will come in and appoint a guardian to manage those funds on their behalf.
• 5:39
  And that's not necessarily the person that you would have chosen.
• 5:42
  And the money may be managed in ways that don't reflect your intentions or values until that child turns 18.
• 5:49
  At 18, they receive the full amount outright.
• 5:52
  There's no conditions, no structure, no phase distribution.
• 5:55
  And at your wealth level, naming a trust for the benefit of a minor child is almost always better to have a structure behind it that represents what you would want them to use the money for and when.
• 6:06
  Mistake number three is having no contingent beneficiary.
• 6:08
  Now, if your primary beneficiary predeceases you and you have no contingent listed, the asset is going to default to your estate, which means it's going to go through probate.
• 6:18
  The entire efficiency of the beneficiary designation, which is designed to help bypass probate entirely, that is now lost.
• 6:26
  So make sure you're always naming at least one contingent beneficiary on any account that you have.
• 6:31
  Mistake number four is misalignment with your estate plan.
• 6:35
  If your will says your estate is divided equally among your three children, your 401k names only one child, the one where you are closest to when you open that account 15 years ago.
• 6:47
  Here's the result.
• 6:48
  That child receives the retirement account.
• 6:51
  They're going to receive it directly.
• 6:53
  Now, the remaining estate after the retirement account is removed is then going to be divided among all three children.
• 7:00
  The distribution is not going to be equal like you intended, even though you listed that out in the trust documents or in your will.
• 7:08
  A single outdated form created an outcome that you never designed and now can't change since you're no longer here.
• 7:14
  Mistake number five is naming your estate as a beneficiary.
• 7:18
  This seems like a flexible solution, but many times it's not.
• 7:21
  Naming your estate as a beneficiary of a retirement account sends the assets through probate, which is going to defeat the purpose of the designation.
• 7:32
  Now, more importantly, it also eliminates the option for your children to take a distribution over time.
• 7:40
  The Secure Act rules if the estate is the beneficiary of a retirement account, then the IRS actually might require the account to go through a distribution within five years.
• 7:52
  You heard that right, five years.
• 7:54
  That creates a compressed expensive income tax event for your heirs, and it's usually happening at the wrong time.
• 8:01
  One update that I want to make sure you understand because it directly affects how beneficiary designations on retirement accounts work in 2026.
• 8:09
  The IRS has finalized new rules on inherited IRA distributions that became effective in the year 2024.
• 8:15
  Now, for non-Spouse retirement beneficiaries, meaning your adult children, there is now a 10-year rule.
• 8:22
  They must fully distribute the inherited IRA within 10 years of your death.
• 8:28
  And here is the part that surprises most people.
• 8:30
  If you were already taking required minimum distributions, aka R and D's when you passed away, meaning you had reached your required beginning date, your beneficiaries are also now required to take an annual distribution in years one through nine.
• 8:45
  They can't just let the money sit and clean it out in year 10.
• 8:49
  They must take these distributions every single year, in addition to, now this is the key thing, fully being distributed by the end of year 10.
• 8:57
  That account needs to be zeroed out.
• 8:58
  So why does this matter for beneficiary designation strategies?
• 9:02
  Because who you name and how you structure it affects how efficiently those distributions happen from a tax perspective.
• 9:10
  Naming your children directly produces one outcome.
• 9:13
  However, naming a conduit trust or an accumulation trust produces a different tax treatment.
• 9:20
  There are meaningful differences for the total tax bill that is paid and the distribution window that exists.
• 9:26
  Now, at your wealth level, the structure of your retirement account, beneficiary designations, deserves the same level of analysis as every other part of your estate plan.
• 9:36
  It is not a form that you fill out once and then just go on to forget it.
• 9:40
  It is a strategic decision that you are making.
• 9:43
  I want to share a story that I think makes everything we just covered feel very real.
• 9:48
  Once again, details are changed to protect privacy, but this situation is drawn from an actual experience that I have seen through my wealth management practice.
• 9:55
  A client, let's call her Sandra, came to my office after her divorce was finalized.
• 10:00
  She was 56 years old, and this divorce had been difficult and had taken nearly two years.
• 10:05
  She had a good attorney and a fair settlement, and she was always ready to move forward.
• 10:10
  Now, as part of our first comprehensive review together, we went through every single account that she owned.
• 10:17
  This was her investment accounts, retirement accounts, life insurance, you name it.
• 10:22
  And when we pulled the beneficiary form on her 401k, the account had been growing for 24 years now and held a little over$900,000.
• 10:31
  The primary beneficiary was still her ex-husband.
• 10:35
  She hadn't thought to change it.
• 10:36
  She had opened that account in her late 20s, named him, and never looked back at that form again.
• 10:42
  Not once in their entire 24 years of marriage.
• 10:45
  Her divorce decree said that she was entitled to her own retirement assets.
• 10:49
  Her will, which she had updated during the proceedings, left everything to her two adult children.
• 10:55
  So they were over the age of 18 and not minors in this situation.
• 10:59
  But none of that mattered because the 401k beneficiary form hadn't been updated and the form was in control.
• 11:06
  The divorce decree wouldn't even override it.
• 11:09
  This will does not override it.
• 11:11
  Only the form will control this.
• 11:12
  We caught it, thankfully, and we updated it within the same week, but Sandra sat with that for a moment because of the panic that came up and the awareness that if something had happened to her before we did that meeting,$900,000 would have gone to the man she was no longer married to, regardless of everything else that she had carefully put in place, and her children would have missed out on that money.
• 11:33
  She said to me, I updated everything else after the divorce.
• 11:37
  I changed my locks, I changed my email password, I even changed my emergency contact.
• 11:42
  However, it had never occurred to me that the retirement account had its own form.
• 11:47
  It occurs to almost no one until it's too late or until they listen to an episode like this one.
• 11:52
  And that is why we record episodes just like this one on this show to make sure you don't find yourself in the same situation.
• 11:58
  Now, this is one of the most important actionable episodes I record because the fix it is straightforward.
• 12:04
  The only thing required to do is actually going out and just doing it and getting it done.
• 12:10
  Now, action number one, audit every account this week.
• 12:14
  Make the time to do so and make a complete list of every account that has a beneficiary designation form to it.
• 12:20
  Every retirement account at every single custodian, every life insurance policy, every annuity and every bank account with a POD designation, every investment account with a TOD designation.
• 12:31
  For each one, pull the current beneficiary form or even call up the custodian and asked who is named.
• 12:37
  Don't just assume, take the time to actually verify.
• 12:40
  I cannot tell you how many times I have sat with a client who was certain she knew her beneficiary form and what was set on it.
• 12:47
  And a lot of the times, people are wrong.
• 12:50
  Action two, run through these four red flags for each account.
• 12:54
  Number one, is the name beneficiary still alive?
• 12:56
  Two, is that relationship still current?
• 12:59
  No divorce, no estrangement, because that might change your intent.
• 13:03
  Number three, is the name contingent beneficiary on there?
• 13:06
  And number four, does this designation align with my current estate plan and current distribution intentions?
• 13:13
  If you answer no to any of these questions, or maybe you're even uncertain, then that account needs to be updated.
• 13:20
  Before you leave this episode, I want you to write down the accounts that you're unsure about.
• 13:24
  Make a list, and this list is now your action item.
• 13:27
  Action number three is coordinate your beneficiary designations with your estate plan.
• 13:31
  And this should be a team conversation, not just something you do willy-nilly.
• 13:36
  Do not update beneficiary designations in isolation.
• 13:39
  The right beneficiary for a retirement account at your wealth level might be a trust, not an individual.
• 13:46
  And whether the trust should be a conduit trust or an accumulation trust, there are different tax implications that require coordination between your financial advisor, your estate attorney, and even your CPA.
• 13:57
  This is a team conversation and it should happen every time you update your estate plan and every time that you experience a major life event.
• 14:06
  And one final note that I want to be very direct about.
• 14:08
  This is not a one-time exercise.
• 14:11
  Beneficiary designations need to be reviewed, I would say at least on an annual basis.
• 14:16
  Set a time as a calendar reminder or have your financial advisor do it.
• 14:19
  And it should be the same time every year.
• 14:21
  It takes one afternoon and it is one of the highest value hours or afternoons that you will spend in your financial life because the alternative, when it goes wrong, can cost your family years.
• 14:31
  Every time you need to come back and update your beneficiaries, this episode will be here for you to review.
• 14:37
  Listen in again, and this is a great one to share with other members of your friends, family, or anyone you care about to give them the reminder and that wink, wink, nudge, nudge of hey, have you done this recently?
• 14:48
  Send them the episode, share it with them, keep each other accountable.
• 14:52
  And I can't wait to see you again on the next episode of the Wealth Cafe.