Beneficiary designations crucial part of planning

Steve Gammill

Rancher Ralph was married to Matilda and they had a son named Ralphie Jr. They bought an insurance policy insuring Ralph’s life and naming Matilda as beneficiary. It’s a very common and, unless one has a trust in place,  appropriate thing to do.

Regardless of whether you have had a will or a living trust drafted and put in place, you very likely own assets that have what are called  designated beneficiaries. A life insurance policy is a good example. You might own the policy and you might be the one whose life is insured by the policy.  The one getting the money when the insured passes away, however, is called the beneficiary. Typically, the beneficiary is listed in the policy as a spouse or children.

The same applies to your individual retirement account, 401(k) and certain other investment accounts. They all have a beneficiary designated in the paperwork.

Choosing who to name as your beneficiary is too often just a routine insertion of the spouse’s name into the blanks. I used to marvel when clients would tell me they didn’t know who the named beneficiaries were on their employers’ retirement plans. It would turn out clerks had routinely named the spouse.

The choice of a beneficiary is something that requires careful thought.

Years later, Ralph and Matilda divorced and Ralph went about his life and business as usual, continuing to make premium payments on the insurance policy and never giving it a second thought.

There came a time, though, when he was considering marriage to a younger woman. In fact, she was only a few years older than Ralphie Jr. It occurred to Ralph he’d like his son to have the life insurance policy at Ralph’s death. That would make it easier to take care of the new wife without requiring Ralphie Jr. to wait for her death to realize his inheritance — an event that could follow Ralphie Jr.’s own death.

So Ralph went to his family lawyer and instructed her to write a new will leaving all of the insurance proceeds to Ralphie Jr. He signed it and felt comfortable he’d handled the situation. It never occurred to him that when he’d purchased the policy way back when, he’d named Matilda as beneficiary and never gave a thought to changing it.

Surprise. At Ralph’s death, Matilda will receive the policy proceeds regardless of the provisions in the will.

Designating beneficiaries can have important business planning ramifications as well. When business succession planning is undertaken seriously, insurance issues raise many questions beyond just the naming of the proper beneficiary. Businesses often purchase life insurance on key employees, partners and owners. It’s a planning area filled with complex decisions about who will own the policies, who will be the named beneficiaries and what will be done with the proceeds.

Also consider how you want your beneficiary to receive insurance proceeds or IRA accounts. Do you want that beneficiary, your child for example, to receive substantial amounts of cash in his or her pocket regardless of the physical, mental or financial condition of that beneficiary? Certainly not if you think about it.

What if she’s in a rocky marriage? What if his business is on the verge of failing? What if the beneficiary is entering assisted living and needs to qualify for governmental assistance or was severely injured in the same accident that took your life and now has a multitude of medical, and perhaps other, creditors? Should the injured beneficiary’s bank account be laid bare for those creditors, legitimate and otherwise?

And since we usually don’t know about those circumstances ahead of time, planning is all the more important.

Bill and Carole had a series of substantial conversations with their financial advisors and estate planning attorney when they realized they fell into many of these cracks in their planning. They discovered  there are even more traps for the unwary in considering their IRAs and other tax-deferred retirement accounts.

It’s often wise to name your revocable living trust as your beneficiary. But doing that can be a boon or a boondoggle. It’s a subject for another time, but another example of the need for careful planning.

Steve Gammill is an estate and business planning attorney in Western Colorado. Gammill is a nationally recognized teacher of strategic and tactical planning to lay persons and professionals alike. What sets him apart is his emphasis on story based planning. He has practiced for nearly 50 years and sees clients by appointment only. To learn more or contact him, visit
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Posted by on Jun 12 2013. Filed under Contributors. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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