Beneficiary Designations Not Always Simple for Donors

Some Americans are using beneficiary designations in lieu of wills for their estate planning. But what can seem like a simple process can lead to difficulty, according to a Department of Labor report on beneficiary designations for retirement plans and life insurance.

“The complexity of the rules under ERISA (the Employee Retirement Income Security Act of 1974) may, in some cases, lead to beneficiary designations that do not accurately reflect the participant’s intent,” states the 2012 report from the department’s advisory council. “This can frequently result in disputes regarding who is entitled to the plan benefits following the death of the participant.”

The advisory council recommended that the Department of Labor develop educational materials for individuals and develop guidelines for employers and plan administrators. Those recommendations are still under consideration by the department.

The increase in beneficiary designations has been widely reported by those in the industry, though there has not been a formal research study to provide statistics. The decline in the percentage of older Americans using wills has recently been documented: from 61.2 percent of those 55 and older in 2000 to 53.9 percent in 2010, according to the 2013 study American Charitable Bequest Demographics. Of course estate-planning professionals advise having a will in addition to making beneficiary designations.

An increasing number of planned gifts are being made through beneficiary designations because of the simplicity and also because they are easily revised if there are changes in the donor’s circumstances. The designations are being used for bank and brokerage accounts in addition to the retirement plans and life insurance policies addressed in the report.

The advisory council said that individuals making beneficiary designations need to know:

• The importance of reviewing and periodically updating their beneficiary designations.
• The significance of reviewing and changing designations when life events occur (e.g., marriage, divorce, birth of a child).
• The importance of maintaining records such as paper and/or electronic copies of all executed designations.

The report says that the most contentious disputes occur when there is a marriage or divorce without the designation being updated.

“Beneficiary-designation elections … are likely to remain in effect for long periods of time without participants reviewing or updating them to ensure that the designations reflect their current intentions,” the report states. “Participants often forget who they designated as beneficiaries. In some cases, participants may not even know whether they have a completed beneficiary-designation form.”

The report recommends that professionals involved with beneficiary designations help individuals understand the importance of maintaining records and of periodically reviewing the designations.