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Employee Benefit Services

The Importance of Beneficiary Designation Forms

The beneficiary designation form is an estate planning tool that ensures assets are passed to the correct person(s) or organization(s) after a person’s death.

Beneficiary designations are not only important, but essential for individual legacies and business entities that act as plan sponsors for their employees.

Understanding the Role of a Beneficiary

A beneficiary is an individual who receives assets. In other words, a beneficiary is a person or entity listed on a financial account to receive the property or asset upon the owner’s death.

Beneficiaries do not have to be relatives. They might be neighbors, close friends, or even charitable organizations. Assets can also be divided among numerous persons and organizations, allowing the owner to further personalize their estate plan.

A life insurance policy is probably the first thing that comes to mind when thinking about beneficiary designations. However, it is important to understand that retirement, checking, savings, and investment accounts can also include beneficiaries in the form of Transfer of Death (TOD) or Payable on Death (POD) designations. The following looks at how beneficiary designations may impact a person’s will, TOD, and POD.

Beneficiary Designations & Wills

The link between beneficiary designations and a person’s will can be confusing. Making beneficiary designations is not the same as leaving assets to a person or organization in a will. Beneficiary designations take precedence over provisions in a will or trust.

For example, if an individual leaves everything to his or her children in a will, but the ex-spouse is the beneficiary on the accounts, the estate will go to the ex-spouse rather than to the children. Even if the will was modified after the divorce to identify the children, the beneficiary designation of each asset would determine where that item goes when the owner dies.

Beneficiary designations are a type of estate planning and should be done with care. Think of adding beneficiaries to an account as entering into a binding contract; therefore, it is critical to evaluate beneficiary designations regularly to ensure that the owner’s goals remain in place.

TODs and PODs: What They Are & Why They Matter

Using TOD and POD accounts gives an individual a choice over where assets end up and avoids probate. Regardless of what is specified in the will, the assets in these accounts will be distributed straight to the listed beneficiaries.

Transfer on Death

When the account owner dies, all assets in the TOD are transferred to the beneficiary, avoiding probate. An existing account can be converted to a TOD or a new one can be created. The TOD account may be set up for brokerage accounts, investment accounts, retirement accounts, and, in some circumstances, real estate.

While avoiding probate is a significant benefit, TODs can sometimes result in problems with joint TOD accounts. Use caution when naming young children as beneficiaries, since most state laws forbid minors from controlling assets or property.

Payable on Death

POD is an arrangement that names beneficiaries on bank accounts and CDs. The beneficiary cannot collect the money while the account owner is still living. However, when the owner dies, the account is automatically transferred to the beneficiary, bypassing probate.

The main advantage of POD accounts is that the quantity of FDIC-insured assets is enhanced. For example, FDIC coverage can be increased from $250,000 to 1.25 million if five parties are listed in the account, including the owner and beneficiaries. This is a benefit if an individual has numerous accounts at the same institution.

The Importance of Employee Beneficiary Form for Businesses

One of the first responsibilities assigned to new employees is to complete paperwork for the company’s benefits program, including the beneficiary designation form. Failure to complete a beneficiary designation form can cause difficulty for the plan sponsor and the employee’s family.

Auto-enrolled participants in the company’s 401(k) plan may overlook declaring a beneficiary since they do not enroll in the plan. In plans that feature automatic enrollment, it is crucial to ensure that all members have a beneficiary form on file.

Therefore, plan sponsors that auto-enroll their members should include a beneficiary designation form in the auto-enrollment process. Employee benefit services should streamline the process and make sure beneficiaries are designated and regularly updated.

What Happens If an Employee Does Not Choose a Beneficiary?

If a participant does not choose a beneficiary, the plan will designate a default beneficiary. Suppose the participant is married at the time of death. In that case, the surviving spouse is usually the default beneficiary, which makes things simple.

However, if there is no surviving spouse, the plan will state who is next in line to be named as the beneficiary. If there is no election on file, it is not unusual for plans to name the estate of the dead participant as a last resort beneficiary.

Updating Beneficiary Designation Is Crucial

Beneficiary designations have a substantial impact on how assets are distributed. Therefore, participants should review their beneficiaries regularly to keep beneficiaries up to date, especially if there is a life-or-death event in the family. It is advisable to review beneficiaries every 1 to 3 years to ensure that there are no surprises.

Keeping track of beneficiary designation updates is also crucial for sponsors of retirement plans. Suppose an employee gets divorced and subsequently remarries, but the beneficiary form is never updated. Depending on the plan’s rules, the benefits in their retirement account may go to the ex-spouse.

Failure to have completed beneficiary paperwork can cause misunderstanding and difficulty for the plan sponsor and the employee’s family. When substantial changes in life events occur, such as divorce, death of a spouse, or the birth of a child, participants should make beneficiary election adjustments.

Plan sponsors should consider doing an annual assessment of employees’ forms at the start of a new plan year or when participant statements and notices are sent annually to ensure that everything is up to date. This will guarantee a seamless experience for everyone.

Take Charge of Beneficiary Designations with Windes

Windes provides employee benefit services to businesses and sponsors of retirement plans. Connect with us to learn more about our services.

Therese Cheevers
Therese Cheevers, APA, ERPA

Partner – Chair, Employee Benefit Services
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