Important! Update your Retirement Account Beneficiaries

October, 31 2024 by Carolyn Richardson, EA, MBA

While no one likes to think about death, as my dad used to say, “No one gets out of this life alive.” And not planning for your eventual demise means, in this Halloween season, that you could potentially leave a horror show for your heirs. While many financial planners and legal experts advise you to have a will and possibly a living trust in hand, as well as medical powers of attorney, how many have reminded you to double-check the beneficiaries of your retirement accounts? Failing to do so can have significant unintended consequences for your heirs, and a couple of recent court cases illustrate the pitfalls of failing to keep your beneficiary designations updated.

The first case, decided on June 20, 2024, [Sherry Yali Liu, Plaintiff, v. Kaiser Permanente Employees Pension Plan, defendants, #23-cv-03109-AMO] illustrates how too many people rely on default designations for who receives their retirement accounts. In most states, a default designation is a matter of law and, generally, the default designation means that a married taxpayer’s spouse will inherit a retirement account first, after which the taxpayer’s children or other descendants inherit once the estate goes through probate (or according to a living trust, if there is one). If the taxpayer intends for the account to be inherited by someone else, they need to complete a beneficiary designation form. In this case, the taxpayer, Ya-Xia Liu, was a single woman who had worked for Kaiser for over 20 years and had told her sister, Sherry, that she would inherit the account. Ya-Xia never married or had children or other dependents. After her death, her sister filed a claim for the benefits under the employer’s retirement plan, but the claim was denied. Ya-Xia had never completed a beneficiary form for the plan and, since Sherry was not a spouse, child, or other dependent of the deceased taxpayer, she was not a default beneficiary.
 

While the deceased taxpayer had started an online beneficiary designation, she had not completed the process. And the plan’s rules stated that all the steps of the designation process had to be completed before the designation went into effect. Sherry stated that her sister “substantially complied and would have fully complied” with the requirement had she not died. The Court ruled that if the plan had been less specific, then Sherry could inherit the account, but because it stated that all steps needed to be completed, they could not rule that she was the intended beneficiary.

In the second case, again decided in 2024, the taxpayer’s 401(k) beneficiary designation was old and out of date [The Procter & Gamble U.S. Business Services Co. et al v. Estate of Jeffrey Rolison et al., Case Number 3:17-cv-00762, in the US District Court for the Middle District of Pennsylvania]. Jeffrey Rolison had accumulated over $750,000 in his 401(k) account with Proctor & Gamble during his employment from 1987 until his death at the end of 2015. When he initially enrolled in the plan, he designated his then-girlfriend, Margaret, as the sole beneficiary. The relationship ended in 1989, but he never updated his beneficiary designation, despite multiple reminders from P&G that he could change his beneficiary to the plan. When P&G went to an online system for designating a beneficiary, he received multiple emails over the years that recommended that he review his beneficiary designation. When Jeffrey Rolison passed away, his estate sued P&G for allegedly failing in its fiduciary duty under ERISA by not providing Rolison with specific information regarding his designated beneficiary, but only providing generic information reminders to employees. The beneficiaries of the estate were Rolison’s brothers.
 

After P&G moved to an online beneficiary designation form in 2015, the Court noted that Rolison had logged into his account multiple times and had never taken affirmative steps to change his previous beneficiary, even though he was aware he could so online. As such, the Estate could not show that Rolison was confused by the system for designating a new beneficiary online, and that P&G had warned him multiple times over 13 years that if he failed to update the beneficiaries online, his previous paper designation would remain valid.
 

As a result, the Court ruled that Margaret was the intended beneficiary of the retirement account.

These cases illustrate how important it is to make sure that your designated beneficiaries are kept up-to-date as you age or your retirement situation changes. Even if your will or living trust designates beneficiaries of your accounts, unless you follow the plan’s rules on designating the beneficiary of the plan, such as by completing a beneficiary designation form, the plan is bound by law to go by your last beneficiary designation they have on file. If you have strong feelings about who inherits your money, particularly if you are not married, this designation becomes critical. And it’s important to review it when your life situation changes, such as when you divorce your spouse, or when your spouse, children, or siblings and other designees pass away before you. If the beneficiary passes away before you, and you do not change your designations, the account could go to any number of alternate beneficiaries, depending on your state’s probate laws and the plan rules.
 

And don’t forget to update your beneficiary when you change jobs, retire, or move your IRA accounts. This is very important when moving your retirement account between trustees, such as moving your IRA from one trustee to another or moving your 401(k) into an IRA account, as the previous designation does not carry over to the next trustee.

Can you really rest in peace if you leave family drama in your wake when you pass away?