written by Gary Altman. Esq., CFP |  

With Tax Day behind us, the IRS is now hard at work auditing as many returns as possible in an effort to make sure that citizens are playing by the rules. For this reason, the word “audit” doesn’t sound very appealing to most people. However, in my area of practice, estate planning, an audit is a powerful and potentially game-changing tool. Boomers , allow me to introduce you to the “Beneficiary Audit”.

Take This Into Account

One aspect of peoples’ financial lives that is often overlooked is the designation of beneficiaries to their retirement accounts , annuities and life insurance policies. As you might assume, a designated beneficiary receives an account or proceeds of an account upon the death of an individual (a.k.a. the owner of said accounts). But what is the correct beneficiary designation? And how do you make sure that your designations are current, correct, and coordinated with your goals, objectives and estate plan? The answer is to conduct routine “Beneficiary Audits”.

In my practice, a Beneficiary Audit involves reviewing the beneficiary designations for each of a client’s financial accounts (i.e. retirement accounts , annuities, life insurance policies, etc.) and then analyzing how smartly those designations match up with the client’s objectives as well as the tax and non-tax laws regarding distributions for the accounts.

Is That Your Final Answer?

It is crucial to determine if the named beneficiary is the correct beneficiary. It is surprising to me, as an estate planning attorney, how often the named beneficiary is an ex-spouse, deceased family member or even someone the client no longer has contact with. I have even seen people list their “estate” as a beneficiary which is disastrous in terms of payouts from retirement accounts and annuities and can result in increased court costs as well as exposure to creditors. 

I have also seen individuals forget to name their spouse, children or a trust for their benefit and instead the proceeds or account goes to a parent, sibling or ex-girlfriend. Any time a client gets divorced, married, has children or has any other life changing event, he or she must update beneficiary designations . In most states, settlement/divorce agreements or a new marriage does not supercede the beneficiary designation, even if it’s outdated. So, the named beneficiary, regardless of their current relationship with the deceased, inherits – not the new spouse or family.

One Size Doesn’t Fit All 

When it comes to beneficiaries, one size does not fit all. It is important to determine if the beneficiary in a minor. In most states, a minor (i.e., a child under the age of 18) may not receive the proceeds from a life insurance policy , annuity or retirement plan directly. Instead, if a minor is named, the minor’s parent (or someone else) must go to the local court and become the minor’s legal guardian. Not only does that cost in terms o...