Scary Financial Mistakes: Failing to Update Your Beneficiary Designations

Oct 22, 2020

By Theresa Fry, Senior Vice President and Manager, IRA’s and Retirement Planning

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Having the details of your personal and financial life made public would be horrifying for most people. Yet, I see it all the time with IRAs, 401(k)s and other retirement account assets. Two common situations that can cause your private financial matters to be made public are not naming a beneficiary and forgetting to update your beneficiary designations after divorce.

No Beneficiary Named, Estate Beneficiaries and Probate
It is frightening how many people either forget or overlook completing a beneficiary designation for their retirement accounts. The scary thing is, by not naming a beneficiary yourself, you are allowing someone else to determine who receives your retirement savings after your death. In many cases, if no beneficiary is named by you, the retirement account trustee or custodian may default to your estate being the beneficiary. If that happens, or if you name your estate as the beneficiary of your retirement account, the assets will be included in probate. Probate proceedings can vary from state to state, but they are a matter of public record. The probate public notice requirement means anyone can find out anything they want to know about your property, assets, beneficiaries and financial accounts – and many states now have these probate files in online databases for easy access. Probate also can tie up assets for months and be expensive. These things can be easily avoided if you name your retirement account beneficiaries yourself.

Forgetting to Update Your Beneficiary – Ex-Spouse Does Not Mean Ex-Beneficiary
As the saying goes, “The love of money is the root of all evil.”  It can bring out the worst in some people. Failing to update your beneficiary designation may result in family members fighting over what your real intentions were. If that is a nightmare you wish to avoid, consider what can be learned from two U.S. Supreme court cases that had to decide between the children of a prior marriage and a second ex-spouse.

In the Egelhoff case[1], the children of a recently divorced Boeing executive, who was killed in a car accident two months after his divorce from his second wife, were told they had no rights to their deceased father’s employer-provided life insurance and retirement account. Why? Because the father never removed his second wife as beneficiary.  Both the second wife and the children from his prior marriage felt they had a claim to the Boeing provided benefits even though the second wife was not awarded either in the divorce settlement.  The case worked its way all the way up to the U.S. Supreme Court for the decision to award both to the second wife.

Many states, like the state of Washington that was involved in the Egelhoff case, have laws that revoke any claims a former spouse may have after a divorce is finalized. However, employee benefit plans like those provided through Boeing in this case fall under the federal law, ERISA.  ERISA rules trump state laws.

Another case that involved a life insurance policy had the opposite result. In the Sveen v. Melin case[2], the ex-spouse was not removed as primary beneficiary of a life insurance policy after the couple divorced in 2011. It took until 2018 for it to work its way to a Supreme Court ruling that the contingent beneficiaries, the two children from the prior marriage, were entitled to the life insurance proceeds and not the ex-spouse. Why did this one go the other way? The life insurance policy was not part of an employee benefit plan. Non-ERISA assets, like individually purchased life insurance policies, annuities, and IRAs, follow state probate laws. The Supreme Court got involved because the second spouse claimed that the policy was purchased before the state modified its laws in 2002, and therefore was not subject to automatic revocations after divorce.

In both cases, the states had laws that automatically revoked an ex-spouse’s rights to the property. But not all states have such laws. As these cases demonstrate, years of calamitous public family drama and legal expenses could have been avoided if the decedent had simply updated his beneficiary designation at the time of the divorce – making clear what his intentions were.

Tips to Avoid This Scary Financial Mistake

  • Having a will does not replace a beneficiary designation. IRAs, 401(k)s, life insurance and annuities all pass directly to your loved ones through the naming of beneficiaries on that account, policy or contract. Your will does not supersede the beneficiary designation.
  • Name primary and contingent (back-up) beneficiaries. Doing so makes clear what you want to happen if your primary beneficiary(ies) predecease you or if you and your spouse should die together, for example, in a car accident.
  • Clearly identify who you wish to inherit your retirement account. Try to avoid phrases like “my children” or “my spouse.” Identifying individuals by name may mean you have to be more vigilant about keeping your beneficiary designation updated in the event of a divorce, marriage, birth or death of a loved one, but if your beneficiary designation is unclear a probate court may have to decide who inherits your IRA or 401(k).
  • Avoid using dollar amounts. Percentages are easier to administer. If you attempt to use dollar amounts, problems can arise when there is an insufficient account balance. If your situation is more complex and percentages won’t meet your needs, consider consulting an estate planning attorney and discuss the benefits of naming a trust as the beneficiary of your retirement account.
  • Review your beneficiary designations every 2 – 3 years or when life events happen. Sit down with your financial advisor to review your beneficiary designations every few years. This will help ensure your documents stay consistent with your goals. Beneficiary designations can easily become out of date or inconsistent, especially if you have multiple retirement accounts, life insurance policies or annuity contracts to keep track of. It’s fast and easy to update a beneficiary designation.

If it has been a while since you last reviewed your beneficiary designations, schedule a time with your financial advisor today.


Benjamin F. Edwards & Co. does not provide tax advice, therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.