Retirement Chat: Beneficiaries

In this episode of Retirement Chat, we discuss a very important topic that unfortunately is often overlooked: your beneficiary designations. These are critical decisions to make (and revisit regularly) to ensure your funds are distributed as you truly intend when you pass away.

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Audio Transcription:

Intro

Welcome to Union Bank & Trust's Retirement Chat, a series of conversations designed to answer your retirement savings questions and help you reach the retirement you envision. We have our experts with us, so let's chat.

Caitlin

Hey everyone, we're back for another episode — I'm Caitlin Moore, retirement educator here at Union Bank & Trust. Today we're talking about beneficiaries for your retirement plan, and I'm sitting with our expert today, John Nownes, Vice President and in-house ERISA attorney for Retirement Plan Services. John has been an attorney for 28 years and with the bank for 18 of those years. So thanks, John, for being with us today.

John

Thanks, Caitlin. I'm looking forward to the discussion.

Caitlin

So today we're talking about beneficiaries, which is the designation of your retirement funds should anything happen to you. So let's start by just talking through designation. There are various considerations and when it comes to designation, as time goes on, and keeping up with those. Can you talk a little bit about this and the importance of keeping up on your beneficiaries over time?

John

Sure. Although we're primarily talking about 401(k) benefits, there are many other assets that actually get passed through to your heirs by making a beneficiary designation. So in addition to 401(k) plans, there's IRAs, there's health savings accounts, and there's also life insurance proceeds. And I want to make two main points here.

First of all, when you're first hired oftentimes you are receiving an enrollment kit and you're asked to name your beneficiaries for your 401(k) benefits and your life insurance proceeds and maybe your health savings account benefits. It's important to understand that you need to make a beneficiary designation for each of those benefits. So for example, if I complete a beneficiary designation for my life insurance proceeds, that doesn't carry over to my 401(k) benefits — I need to make a different beneficiary designation for my 401(k) benefits.

And the second important point is, is that you should periodically review your beneficiary designations on, in fact, all your benefits and especially your 401(k) benefits. And in addition to that periodic review, if there's ever any type of major life event like a birth or a death or a marriage, that's an excellent time to revisit your beneficiary designations and make sure you know where your 401(k) benefits will go when you die.

Caitlin

Yeah, so you mentioned the life events — one big life event is divorce or legal separation, and we get a lot of questions about this. So can you talk to us a little bit about what happens if either of these happens and you have not updated your beneficiary form yet something still happens to you?

John

Certainly. Most plans are drafted in a way that if you're married and if you get divorced, your beneficiary designation will automatically be revoked. And sometimes plans will also have the beneficiary designation revoked upon legal separation. So let me give you an example. Let's say I get married and I name my spouse as a primary beneficiary. So let's understand the difference between a primary beneficiary and a contingent beneficiary. A primary beneficiary will get all of my benefits, all my 401(k) benefits, if I pass away. But if my primary beneficiary dies before I do, then my contingent beneficiaries would receive my benefits. So back to our example, I'm married, I name my spouse as primary beneficiary. We don't have any kids when we get married. And so what I do is I name my spouse as primary beneficiary, and let's say I name my parents as contingent beneficiaries.

So my spouse and I, we end up having kids, we get divorced, and the question is, who gets my 401(k) benefits? The plan is drafted in a way that says the divorce will revoke my primary beneficiary designation of my spouse. But remember, I named my children as contingent beneficiaries. So a lot of plans are drafted in a way that my parents, let's go back, I think I said kids as contingent rather than parents. So to pick up, so remember I named my spouse as primary beneficiary. I named my parents as contingent beneficiary. So the divorce will invalidate and revoke the naming of my spouse's primary beneficiary. So the question is, who will receive my benefits if my spouse dies before I do, will it be my parents as contingent beneficiaries or will it be my children? Most plans are drafted in a way that says that my parents in this case would receive all of my retirement benefits as contingent beneficiaries. And that might not be the result I wanted. I might have wanted my kids to receive my benefits upon divorce.

So what I should have done was revisit my beneficiary designation upon the divorce and updated my beneficiary designation, naming my kids as my primary beneficiaries.

Caitlin

Alright, so what happens if somebody doesn't have a beneficiary form in something happens to them?

John

So we've talked about how it's important to review and update your beneficiary designations, but most plans are drafted in a way that, if I don't specifically name a beneficiary to receive my 401(k) benefits, the plan includes provisions that will determine how those 401(k) benefits are distributed. Most plans are drafted in a way that provides that if I don't name a beneficiary to receive my 401(k) benefits, then the plan will determine who will receive those benefits. And most plans are drafted in a way that provides that if I'm married, my spouse will receive those benefits. If I'm not married, then my children will receive those benefits and equal shares. And if I don't have any children, then my parents will share those benefits and equal shares. And then if I don't have a spouse, children or parents, then my estate will receive those benefits.

So let's give an example of what happens: I haven't named a beneficiary to receive my 401(k) benefits. And let's say I marry my spouse who brings two young children into the marriage. I don't bring any children into the marriage, but I raise those two children as if they're my own. I never make a beneficiary designation. My spouse dies before me. What happens to my 401(k) benefits? Remember, I haven't made a beneficiary designation. So the plan will determine how those 401(k) benefits are distributed and pursuant to most plans, default beneficiary provisions that I don't have a spouse. So my spouse isn't going to get those benefits. I don't have any children because these are my stepchildren. I never adopted them. So even though I've raised these children as my own, my stepchildren are not going to receive any of those benefits. And so it's going to go to my parents if I have parents living or it's going to go to my estate if I don't have any parents living. And that is obviously going to frustrate what I wanted to have happen to my 401(k) benefits. I wanted them to go to my stepchildren and instead they may go to my parents or my estate. So it's important to understand where your 401(k) benefits are going to go when you die.

Caitlin

So the bottom line here is really, update your beneficiaries, keep them updated, take a look at them, fill them out online or with your benefits department.

John

That's absolutely correct.

Caitlin

Alright, so next question for you. Can you describe the spouse as a 100% primary beneficiary role and spousal consent rules if a participant wants all or a portion of their death benefits to be paid to a non-spouse beneficiary?

John

Certainly. How 401(k) plans are written is that if I am married, my spouse has to be a 100% primary beneficiary of my 401(k) benefits unless my spouse consents to me naming somebody else as primary beneficiary. So it doesn't matter whether I want to name somebody else as a 100% beneficiary or a 1% beneficiary. If I name any beneficiary other than my spouse to, with respect to any portion of my 401(k) benefits, my spouse needs to consent to the naming of that other beneficiary. So let's give an example. Let's say I'm on my second marriage. I have two children from my first marriage and I want to designate my children from the first marriage as 50% primary beneficiaries of my 401(k) benefits. So that's what I do. I don't name my second spouse as primary beneficiary. My second spouse has not consented to the naming of my children from my first marriage as beneficiaries. I die, and because my spouse never consented, my children are not going to get those benefits. Those benefits are going to go 100% to my second spouse. So if you want to name anybody other than a spouse, as a beneficiary of your 401(k) benefits, you need to get your spouse's consent and that consent must be executed in front of a notary public or a plan representative.

Caitlin

Perfect. Well, something we've recently added here at UBT to our beneficiaries is per stirpes. Can you explain this and the difference between per capita and per stirpes?

John

Yes. So the issue here is the difference between primary and contingent beneficiaries. And if the issue we're talking about is, what happens if all my primary beneficiaries die, what will my contingent beneficiaries get? And another example will work here. Let's say I've got I've got two children, child one and child two. Child one has two children of his own grandchild, one and grandchild two, and I decide to name his primary beneficiaries child one and child two as 50% primary beneficiaries before I die, let's say child one dies before I do. So the question becomes does child two get 100% of my 401(k) benefits or does child one's portion of my 401(k) benefits pass to child one's children grandchild one and grandchild two? If you're going to name beneficiaries in a per capita scheme, then what happens would be that child number two would get 100% of my 401(k) benefits, none of the benefits would be passed on to grandchild one and grandchild two. If I want to change that result, I can ask that my 401(k) benefits be distributed in a per stirpes fashion, which would mean that child one would get 50% of the benefit grandchild one and grandchild two would split up child number one's benefits. And that would mean that grandchild one would receive 25% of the benefits and grandchild two would receive 25% of the benefits, and child number two would receive 50% of those benefits.

Caitlin

So it's almost like a generational situation with per stirpes. It could be passed down generationally rather than stopping at just your contingent.

John

That's exactly right. And so it's important to know in your plan whether your plan allows for per capita and or per stirpes, and if it allows for either designation, as most of our plans do, you want to make sure that you're choosing per capita or per stirpes depending on what you want to have happen with respect to grandchildren.

Caitlin

Perfect, well said. Well, any final words about beneficiaries?

John

I think the most important thing is that everybody have an understanding of what will happen to their 401(k) benefits when they pass, do a periodic review of your beneficiary designations and make sure that those benefits are going to the people that you want them to go to. And I would encourage anyone who has any questions about a beneficiary designations that they contact Union Bank or their planned administrator employer.

Caitlin

Well, thanks John for explaining beneficiaries when it comes to retirement plans. And thank you everyone for joining us today for this episode of Retirement Chat.