BEWARE the Bad Beneficiary

n BENEFICIARY: n CONTINGENT BENEFICIARY:

A person or entity who is the recipient of or will receive some or all proceeds of money or property held by the current owner upon a specified event or condition. Such vehicles as life insurance policies, inheritances, annuities or trusts may require that a beneficiary be named.

Should the primary beneficiary precede the account owner, a contingent beneficiary, if so designated, would be next in line.

When an investor opens a qualified account – such as a new 401(k) account, new IRA, new life insurance policy, etc. – an important part of that process is to designate a beneficiary. In most cases, the account owner is required to provide a primary beneficiary

and is able to provide a contingent beneficiary as well. Unfortunately, this may be the last time the account owner thinks about the beneficiary (or beneficiaries) that have been designated, and this can lead to disastrous consequence.

“What problem could possibly arise?”you may ask.

Consider Bob. Like many people today, as Bob has honed his skills over his career, he has pursued newer and better opportunities resulting in Bob changing employers about every five years. As happens often, Bob was so busy changing jobs that in each case he left his 401(k) account back with his former employer. Each of his “orphaned” 401(k) accounts were all but forgotten over time; he figured he’d just “clean this up” later when he approached retirement.

Along the way Bob got divorced and never went back to update his beneficiary despite remarrying. Unfortunately, a terrible accident claims Bob’s life. When presented with the death certificate, the custodians of each of his “orphaned” 401(k) accounts dutifully pay out to the designated beneficiary, who is his ex-spouse.

What can ensue is a legal battle between the ex-spouse and others like a subsequent spouse who thinks they should have been entitled to those assets. Not pretty. Another common scenario involves the death of a spouse. For example, Susan’s husband Todd dies of cancer, leaving Susan and their two children as survivors. Susan continues to work and several years later marries Henry, and they have a child together. Susan had an IRA rollover from a job change prior to Todd’s death and never updated her beneficiary. Susan predeceases Henry. Who does her IRA distribute out to? Her surviving spouse, Henry? Her and Todd’s two children?

Are you sensing how messy this can become?

When there is not a clear, surviving beneficiary the distribution typically is based on the Custodian’s Order Rules. This is spelled out in the Customer Account Agreement, can vary by custodian, and may not mirror the wishes of the deceased account owner. Seemingly benevolent parties who felt they were rightful beneficiaries can soon find themselves mired in legal proceedings that seldom result in a “winner.” That’s why we say, “Beware the bad beneficiary.”

We can’t encourage you strongly enough to periodically confirm your designated primary and contingent beneficiaries are consistent with your wishes. If you are not sure how to go about this task, call your financial advisor for assistance, or you can call our team and we’ll be happy to help!

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Tom McCartney and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Tom McCartney is the Founding Principal of My Advisor & Planner and a Wealth Manager, RJFS. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. My Advisor & Planner is not a registered broker/dealer and is independent of Raymond James Financial Services. Tom and his team are located at 65 N. River Lane, Suite 212, Geneva, IL and can be reached at info@mapyourfuture.net, at 630-457-4068, or you can visit them at www.mapyourfuture.net.

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