How would like to give your ex your life savings? Over your dead body, right?
Well, that's how it could happen. When you sign up for a retirement plan or life insurance policy, you write down your spouse's name as the beneficiary-- and then forget about it. It's virtually invisible...life happens and 10 years later, you're divorced.
"You'd be surprised how many times people will pass away and money will go to an ex-wife or an ex-husband," Michael Carlin, President of Wealth Management, LLC in Scottsdale said.
Carlin has been managing money and doling out advice to clients for more than two decades. He said he's personally seen it happen. But why? Why would your hard earned money to go to an ex? Let's start with how even an ex-boyfriend or girlfriend could get it..
"There are some special rules regarding certain types of retirement accounts, but for the most part where you have a non-traditional relationship (boyfriend and girlfriend) and one of them lists the other as a beneficiary on their bank account or life insurance policy and then they break up, the law does not automatically revoke that beneficiary designation in Arizona," said Kent Berk, President of Berk Law Group in Scottsdale. "Once they break up they need to go back and change the beneficiary."
Though Arizona law revokes rights to the other's assets in a divorce or annulment, federal law will likely override that revocation in an ERISA-governed plan, meaning the ex could still end up with some or all of the assets. Under ERISA, plan administrators are required to disburse the money to the person they are instructed to pay on the form, regardless of extenuating circumstances like divorce. The beneficiary designation even overrides a will, so don't expect an attorney to know and successfully fight for your wishes if your loved ones end up in a probate nightmare.
"The courts get involved if you don't provide the right indication as to where your money is going to go," Carlin said. "As soon as the courts get involved it's public, it's costly and it's not in the best interest of the people you want to leave your money to, whatever amount it might be."
Carlin suggests taking stock of your assets and to whom they're going every time there is a major life event such as a birth, death, marriage or divorce. It may save those you leave behind from a lot of hard feelings, hassle and expense.
Five other issues to think about:
1. Listing a young adult as the beneficiary
Face it, a financially secure future isn't what most young people in their late teens and early 20s are thinking about.
"When kids who are under the age of 25 are left big sums of money from life insurance or from retirement plans, it's usually gone in 12 months," Carlin said. "It took a lifetime to accumulate and it's gone in 12 months. It's spent on cars, homes and fun and travel."
Carlin suggests setting up a trust instead and spelling out the rules for how you want the money disbursed.
2. Listing a minor as the beneficiary
If you didn't already designate a guardian, you may have just laid the foundation for complications. Life insurance policies won't pay minors directly. The court will appoint a guardian to control the money until the minor is an adult. Not only is that costly, but they may appoint someone you wouldn't want to have that control.
3. Not listing a contingent beneficiary
Again, people set it and forget it. Or they may leave that space blank. If the primary beneficiary dies before you, you need a back up.
4. Considering listing someone other than your spouse as the beneficiary on a 401k plan
You simply can't...unless your spouse signs off on it. When it comes to spouses, what's yours is mine and what's mine is yours. Favorite siblings, best friends and secret lovers are a no-go on the beneficiary line. What if your beneficiary designation pre-dates your spouse?
"If someone gets remarried but doesn't change the beneficiary from the old spouse to the new spouse, the new spouse is not going to get 100 percent of the balance," Carlin said. "The spouse is entitled to 50 percent of the 401k regardless of beneficiary designation."
5. Not doing any planning
Leaving ambiguity means your money that you worked so hard to save, is not going to go where you want it to go. Even if the right people end up with it in the end, it will be after the legal fees are paid. Even Berk, who makes a living helping people navigate through probate problems, urges you to have a plan.
"Spending the money up front in comparison to the cost of litigation, it's nothing," said Berk. "It's a hell of a lot less than it would cost to deal with the aftermath of the confusion and misunderstanding that can result when people don't have estate planning documents."