There are four ways to give what we have to those we love at death: joint ownership, trusts, wills, and named beneficiaries.
If one path is incorrect then the wrong person may receive your money. And that’s a problem that can’t be corrected after you are no longer here. Unfortunately, this problem occurs far too frequently. A beneficiary that should have been changed isn’t and money is distributed to ex-spouses, long-forgotten friends, and out of contact family members.
An account with a beneficiary is often referred to as a Payable on Death (POD) or Transfer on Death (TOD) account.
If you have one of these accounts or assets you let the company that manages it know to whom you want to receive the money when you die. An account owner can name or change the beneficiary on the account at any time, while they are alive. However, once the owner dies, the company distributes the money to the named beneficiary and no changes can be made. Typical accounts with named beneficiaries include IRA, ROTH, TSP, 401(k) accounts, and life insurance policies.
People usually name their beneficiaries when they open the account or start a new job and then never look at their beneficiary form again.
This causes problems when they have major life changes and the people to whom they wish to give their assets at death are not reflected on an older beneficiary form. The companies that use beneficiary forms are legally obligated to release the funds only to the people and entities listed on the form and cannot extend the assets in the account of those not named such as after-born children nor take money away from divorced spouses. Even if a decedent’s will or trust directs the named beneficiary account to be given elsewhere, the beneficiary form that controls who receives the money.
To change the beneficiary you must contact the company or your financial advisor. Typically a form is completed oftentimes witnessed by one or two people. Other companies permit the beneficiary updates to be completed online. Once you change the beneficiaries, be sure to check and even double-check that your beneficiary changes have been made. That way when you are no longer here your funds actually go to those you love.
I recommend that clients check their beneficiaries every few years, otherwise they may find they are giving what they have to those they no longer love.