Beneficiary Forms Can Override Your Last Will And Testament

You know that deprecating saying that goes around about how the average American spends more time researching the right fridge to buy than studying investing? There’s a corollary to that that should be kept in mind as well: among people who study investing, there is almost no time spent making sure that the paperwork for disbursing the funds (either during life or after it) is done correctly.

The laws regarding the settling of estates, or pretty much anything involving dead people, often have strict rules that look to actual actions rather than intent because the person isn’t around anymore to say what they meant and all that’s left is a swearing contest between adverse parties confident that they know what the deceased individual really wanted.

Per this passage from Yahoo! Finance:

Before Leonard Smith lost his battle with cancer in 2008, he worked with his financial advisors and attorneys to make sure his children received the balance of his retirement funds when he died.

A single mistake, however, thwarted his well-laid plans. Family members realized a year after he died that his IRA beneficiary form was filled out incorrectly. Instead of specifically listing the names of his children along with the percentages designated to each heir, Smith wrote: “To be distributed pursuant to my last will and testament,” where the disbursement of funds was spelled out.

But Smith’s failure to complete the form correctly invalidated the document, making his surviving spouse the beneficiary by default.

“I had no idea that a will could be trumped by an IRA beneficiary form,” Deborah Smith-Marez, 50, Leonard’s daughter, told Yahoo Finance.

Smith-Marez and her siblings fought in court to recover the money, but the court awarded the $400,000 in the IRA to their father’s wife, who married Smith two months before he died.

Like Smith-Marez, many Americans are unaware that long-forgotten beneficiary forms can override wills and undermine their loved ones’ intentions.

One reason why I don’t focus on the frugality aspect of personal finance as much, and don’t really keep up with the leading frugality blogs in the finance field, is because I don’t accept the definition of their term that guides their advice. It almost always comes down to “cheaper is better” being the ultimate conclusion, and even among most frugal authors that explicitly state they are not pursuing cheapness, they still tend to reach their conclusions of what to do based on the result that costs the least.

I see it differently: I think money is a tool, and the responsibility is to maximize every dollar earned by putting it to the best use. The point is to find the balancing act between taking care of your present self and making decisions for your future self in such a way that an older version of you would be grateful to meet a younger version of you.

That’s why, on most frugal sites, you see advice like “this brokerage house only charges $4 per trade” or “you get 50 free trades here for free”, and the underlying bank isn’t well capitalized or didn’t even exist a few years ago. Personally, I’d rather pay $10, $15, or $20 per investment if it’s through a legendary, well-capitalized brokerage house because THIS IS ALL YOUR MONEY WE ARE TALKING ABOUT. Their institutional depth gives you a better product that is worth the extra few bucks, in my opinion (different rules apply if you’re looking to invest $50-$350 per month into individual stocks, because in those circumstances, high fees could frustrate the purpose of building wealth in the early days).

That’s my broader philosophy on the matter; specifically related to forms, I understand that they are no fun, but you need to take a moment (actually, more than a moment) to make sure that you get it right. When the stakes are high (say, the settlement of more than $25,000), then you need to be studying and double checking the necessary paperwork to make sure it’s proper. And if you’re in the six figures, I’d hire a lawyer to double check the work done by the other one. And I would become passably knowledgeable on the topic so that I could apply a good sniff test ahead of time to figure out whether it’s done right.

Wills and beneficiary forms are things that no one wants to think about, but you have to stop and give them their due diligence. What’s the reason why you’re building wealth? For some people, 100% of the purpose is about spending the money on themselves with no consideration of anybody else. If that describes you, fine, you get to ignore this post. But if you have specific intentions about what you want to happen to your money after you die, what’s the point of building wealth if you’re not going to make sure that the money goes to the right place when you can no longer use it? Casebooks of property and estate law are written about men like Leonard Smith who do things approximately right, but miss one precise detail, and then the product of their life’s work ends up going into the hands of folks you’d least expect.

Originally posted 2014-10-01 08:00:47.

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