Four of Douglas Fairbanks, Sr.’s best friends were told they would be remembered in his will, so they were surprised when the document did not mention them. Sixty days after his father’s death, Douglas Fairbanks, Jr. produced an envelope containing a supplementary will that left them $60,000 each.
Yes, financial planning can be complicated, and even seemingly simple tasks are fraught with pitfalls. Getting it right requires understanding the rules, paying attention to details, and having a deep commitment to reviewing and updating.
Fairbanks, Sr. had his joke, but it is no joke when your heirs do not receive assets as you intend. The following three real-world examples in just one area of planning—beneficiary designations—illustrate why having a skillful eye on your affairs is so important.
In the Vanguard
In 2007, Vanguard sent a letter to 170,000 customers titled “Change in beneficiary policy will help you simplify your planning.” The letter outlined Vanguard’s new policy that required customers to use the same beneficiaries for all IRAs of the same type. (Vanguard manages three types of IRAs: rollover, traditional, and Roth.) If Vanguard didn’t hear otherwise, its new policy was to change the beneficiary to match the designation on the most recent form it had received.
Recently, a friend of BWFA was disinherited due to the new policy. His grandmother had two identical accounts with different beneficiary designations at Vanguard. Our friend was a designated beneficiary on the older account, which was changed by Vanguard. Unfortunately, he continues to battle for his inheritance.
We called Vanguard, and it seems they have backed away from this policy. Several representatives said that we can open two or more accounts of the same type and have different beneficiary designations. However, if you are one of the 170,000 customers who had multiple accounts of the same type, call Vanguard at 877-662-7447, and find out what designations you have!
We also called T. Rowe Price and learned that it adopted the policy in 2007, but it will allow customers to have different beneficiary designations for the same type of IRAs.
Leonard Kidder named his three children as beneficiaries of his 401(k) when his first wife passed away, and he properly changed the designations. Then, he remarried and died six weeks later. The U.S. District Court in Louisiana ruled that his new wife, Beth, was the beneficiary of the 401(k) because the plan document stated “the participant’s spouse will be the Beneficiary of the Participant’s entire Vested Interest in the plan unless an election is made to waive the spouse as a beneficiary.”
The Employee Retirement Income Security Act (ERISA), which governs 401(k) plans, requires spousal consent for a plan participant to be able to name a beneficiary other than the spouse. ERISA permits plans to waive the spousal consent if the participant is married less than a year. Leonard Kidder’s 401(k) plan did not have this waiver available. Therefore, his children did not receive their inheritance.
In another case, William and Liv Kennedy were divorced after 23 years of marriage. As part of the divorce agreement, Liv waived her rights to any benefits from William’s DuPont 401(k). However, William never changed his beneficiary designation to the couple’s daughter, Kari.
When William died in 2001, a dispute arose over whether Kari or Liv was the rightful owner. The U.S. Supreme Court decided unanimously that the beneficiary designation trumped the divorce agreement and ruled in favor of Liv Kennedy’s estate (she died in 2007) as the beneficiary.
Making your money pass as you expect is just one of the many issues you might face as your life evolves. One of our jobs is to make sure that the details of a rule don’t get in the way of your intentions.
Contact us at 410-461-3900 whenever you have a question or when you have a life-changing event.