Red Barn Financial Podcast Episode 2 - The Importance of Updating Your Beneficiaries. To learn more about Red Barn Financial check out www.redbarnfinancial.com If you need our help, don't hesitate to reach out and schedule time with us.
Disclaimer: Information in this podcast is for informational purposes only and cannot be relied upon as financial advice. Everyone's financial situation is different and not all investments and financial planning strategies are applicable to all people. Consult your financial advisor for how information you learn may apply to your situation.
Transcript
Have you checked your beneficiary designations? Hey, it’s Sean Moran with the Red Barn Financial podcast. I'm a financial advisor here in Middle Tennessee and on this podcast, we talk about all things financial. So today we're going to talk about the importance of updating your beneficiary designations. What is that? When you set up a 401k when you get an insurance policy and any number of other financial instruments, they're going to ask you who do you want to be a beneficiary? So if something happens to you, who gets that money.
Well, a lot of people think that if you write a Will and you say, hey, my will says that everything goes to my children. Let's say, you think that's the way it's going to go, but as a matter of fact, if you have something different on your designation, then that's what gets followed. So, let's use an example. Let's say John is working for company ABC for about five years, and he's single, and he puts his brother down as his beneficiary because, you know, they're pretty close and there's nobody else and John leaves that company and goes to the second company he is working for and while he's there he meets a woman, gets married, has a family has kids. Let's go ten years or so into the future and John kind of forgets about his old 401(k) from ABC company. Well, when he passes away, you would think that the money in that 401(k) would go through his wife or and/or children, but unfortunately because the beneficiary designation says that it goes to his brother. Well, guess who gets the money? And you're thinking okay, well that's a right. The brother just say no, no, no, I'm good. I know my brother meant to have it go to his family but there's a lot of legal issues involved in that. And so that's why it's so important to do this.
I’ll give you another example, let's say Mike is married and he's got two kids. After certain number of years, he gets divorced, kids grow up, move out on their own, everybody's good. They go and live in their lives and Mike passes and he had a half million dollar life insurance policy. Well, he put the beneficiary as his first wife. The nice part would be if this first wife said yeah, hey, you know, I understand it's not supposed to be me but more likely they say, no, that is supposed to be my money. Now, this is where things can get ugly because there may be a lawsuit that's involved and it's just a matter of a lot of wasted money in a situation like that. All Mike had to do was update the beneficiary while he was alive and everything was going well and everything would have worked out as planned. But there are situations where sometimes people say, hey, here's a life insurance policy, okay? We're getting divorced. You have children, you're raising my children. You want to keep that that policy. I'm good with it and, there's no way that they know that that's not the case. So again, it might have to go to court and maybe something can be done, but if not, there's tax implications to making this right. It can be in either the situations where the person that is set on the beneficiary designation to receive those funds. They can't necessarily just turn around and write a check for that amount to the person that should have gotten the money because that's a gift. And when that happens, you have gift tax consequences associated with that. So an example is, I have a million-dollar life insurance policy that I received and it's really supposed to go to somebody else. If I write them a check for a million dollars, well, I'm allowed to give them a sixteen thousand dollar gift per year (as of 2022) not a million. So that actually goes into my calculation for gift tax, and estate tax. Me as a person just trying to be nice and solve this problem for the other person, I didn't do anything wrong, I have implications because when it comes to estate and gift tax, those taxes are on the giver, not on the recipient. So what you're doing by not doing this is creating situations that can cause some serious issues for the people that you're leaving behind.
It's a good idea once a year or whenever anything changes to go through all of your accounts and look at all the things that you've set up in the past. Make sure your beneficiary designations are still correct, it's really easy. It's a matter of taking, you know, most of them just have a form. Just fill out the form and send it back to the insurance company, 401(k) whatever it is, tell them, here's my updated beneficiary and you're good to go. You don't have to think about it. Again, until something else changes in your life, but this is all too common that this type of thing happens. And I'll give you a slightly different situation that I talked to a client about recently (about a year ago) and this person the situation had come a long before I had heard about it and it was towards its conclusion. But let's just say, grandpa owns a home, he passes away. He leaves the property to his son- we will call him Dad. So, Dad gets Grandpa's home. Well, at that time, the Dad gets that he is has cancer and he's going for treatment and unfortunately over the course of a year- year and a half, it gets worse and Dad passes away. So at that point, mom goes to sell the house. She gets to the closing table is about to sign the paperwork and they tell her; you can't sell this house. She says what are you talking about? Title company said, you don't own this house. They said it's owned by your husband's father (Grandpa) and he passed away. And so when that happens, the property would have to go to his (Grandpa’s) next relative and that would be your daughter, not you. She said, well, you know, he gave it to me, give it to my husband. They said, yeah, but your husband never retitled the home in his name. So therefore, it's still in Grandpa's name and Grandpa's only living descendant is your daughter. So she's the owner of the home. So again, they had to go through expending money to work with a lawyer, go to court, go to probate and solve this issue. I'm not saying these things can't be solved, but they take a lot longer period of time. This person lost out on the sale of the home, as a result of the situation. There are headaches and there's costs involved in not getting this done properly.
So, if you inherited property, make sure that it you put it into your name properly and if you are the person that owns the property, make sure that all your beneficiary designations, go to the proper person because if they don't, you could be creating a situation where you're giving money to somebody that you really may not even want to have the money. Somebody might have a really bad relationship with their ex-spouse, or maybe they were dating somebody, they thought it was going to go well, and they put the person they were dating as their beneficiary. The bad relationship comes to an end years later. They forget about it, get married. Now an old ex-girlfriend is getting your money instead of your family. So this is how important this is.
If you're confused as to what to do to, get this situation solved, talk to your financial advisor. If you don't have one and you're looking for an advisor, we are accepting clients. I'd be happy to have a conversation with you. I'd love to help you with this, whether you engage us long-term or not.
Thank you for listening to this episode of The Red Barn. Financial podcast will see you next episode.
