Dust Off Your Designations

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It’s time for some clean up!

Now that the tax season is behind us, we can all look forward to organizing our stacks of paperwork. However, before you file everything away until next year, you may want to take a closer look at your yearly statements.

In our December 2017 newsletter, we encouraged everyone to update their estate planning, especially if you have had a major life event occur. In addition to updating your estate planning documents, you need to consider the impact that certain changes in your life might have on your various financial accounts. Even with a comprehensively updated estate plan, your accounts may not transfer to the person you intend to receive them; it all depends on your beneficiary designation. For example, the person you name as your beneficiary on your IRA is the person who will inherit those funds, even if your will or trust specifies that someone else will receive the IRA.

Naming beneficiaries is something that most of us do without thinking. It is common to name our spouse or children and leave it at that. But what happens if you divorce and remarry? Or if you have listed your children as beneficiaries and then adopt another child, without updating your designations? These beneficiary designations override any thoughtful estate planning you may have done, so they are important to consider.

Many states, including Michigan, have statutes that provide that a divorce automatically revokes a beneficiary designation in a “governing instrument”. Under Michigan law, the term “governing instrument” includes all of the following: deeds; wills; trusts; funeral representative designations; insurance or annuity policies; accounts with POD designations; securities registered in beneficiary form (TOD); pension, profit-sharing, retirement, or similar benefit plans; instruments creating or exercising a power of appointment or a power of attorney; or dispositive, appointive, or nominative instruments of any similar type”. However, federal law – ERISA – controls the disposition of employer-provided group life insurance and retirement plans, and ERISA requires the plan holder to pay the proceeds to the designated beneficiary, regardless of any state law to the contrary.

One unfortunate example of this is a man who neglected to remove his ex-wife as the beneficiary of his life insurance policy after his divorce. When Mark Sveen of Minnesota passed away in 2011, Minnesota’s state law (passed in 2002) provided that the divorce automatically annulled the beneficiary designation naming his ex-wife, Kaye Sveen; this would allow the proceeds from Mark’s life insurance to transfer to his surviving children. However, Kaye challenged Minnesota’s state law, bringing the case before the U.S. Supreme Court (Sveen v. Melin), where it is still being heard. If past decisions are any indication, Sveen’s children will be out of luck; the Supreme Court has consistently reinforced that ERISA preempts state law on such issues.

Do you know offhand who you have listed as the beneficiaries on your bank accounts? How about your life insurance, 401(k)s (or other retirement accounts), pensions, or annuities? While you’re dusting off your desk and filing away your tax paperwork, check the beneficiary designations on any asset account you might own. Then, contact our office to work with one of our attorneys, who can help you coordinate your estate plan with your beneficiary designations to ensure that your “stuff” goes where you really want it to go, when you no longer need it.