When it comes to planning for the future, most people understand the importance of creating a last will and testament. A crucial and often overlooked piece of the estate planning puzzle, however, is the beneficiary designation on retirement and insurance accounts.

Failing to keep those accounts up to date can have unintended consequences, Inland Northwest consultants and advisers say. 

Ben Klündt, a certified financial planner and partner at Ten Capital Wealth Advisors, says he sees that issue frequently, which is why he makes it a point to bring the issue up during the Spokane-based firm’s annual client reviews. 

“A lot of the time you see that people have never put on a beneficiary, or the beneficiary was someone who passed away, or they got divorced,” Klündt says. “What people don’t realize is the beneficiary form supersedes any other type of legal document. What’s on the beneficiary form matters more than what is stated in your will.”

His best advice is to consult an attorney.

“Consult your estate planning attorney, because what goes on that beneficiary form affects all of your estate that is probated and the estate tax that you may end up paying,” Klündt says.

Lynn St. Louis, founder of Spokane-based Elder Law Group PLLC, also emphasizes the importance of keeping beneficiaries up to date.

“If they have a will, they think the will covers everything, but in fact, it doesn’t,” St. Louis says. 

She clarifies that many financial assets are non-probate assets, which means they pass outside the will. These include retirement accounts such as Individual Retirement Accounts, 401(k)s, 403(b)s, and life insurance policies. 

“Beneficiary designations, non-probate assets, are one of the biggest problematic issues we see with estate plans. And you don’t see those issues until somebody dies,” she adds.

It’s important to note, she says, that Washington state and the federal government have different laws.

In Washington state, laws specify how property is divided when someone dies without a will, aiming to distribute the estate to the closest living relatives.

“The state of Washington really does its best to make sure that if people don’t have an estate plan in place, the state has what’s called the laws of intestacy, and it tries to accomplish what a person would have done had they done a will,” St. Louis says. 

Laws of intestacy, also known as intestate succession laws, dictate how a person’s assets are distributed when they die without a valid will. Such laws vary by state, but generally prioritize close family members.

St. Louis says one of the most powerful examples illustrating the difference in state and federal law is the 2001 U.S. Supreme Court case Egelhoff v. Egelhoff. 

David Egelhoff had named his ex-wife, Donna, as the beneficiary of his insurance policy and employer pension plan. Just two months after the divorce, David died in a car accident without updating his beneficiary forms.

David Egelhoff’s children from a previous marriage believed the ex-spouse should not inherit the funds. After all, St. Louis explains, Washington state law treats divorced spouses as predeceased for estate purposes.

The Supreme Court, however, disagreed. The assets in question were governed by the Employee Retirement Income Security Act, which is a federal law that supersedes state laws. ERISA dictates that retirement plan benefits go to the person listed on the beneficiary designation, regardless of divorce or other life changes.

Despite Washington’s law and the family’s objections, Donna Egelhoff received the full payout from both the pension and the life insurance.

“It’s a fascinating case,” St. Louis says.

She says it’s a cautionary tale for anyone going through a divorce or major life changes. 

"So when you divorce somebody, and you think ‘I’m done with that person,’ unless you go in and make a change, that person might end up getting it all, just like Donna and the retirement assets," she says. 

Klündt adds that non-qualified investment accounts, such as brokerage accounts, can also have Transfer on Death, or TOD, designations, which function similarly to beneficiary forms. If there’s no beneficiary, the asset becomes part of the estate and must go through probate.

“If there is a beneficiary, it just expedites the process versus having to go through and work through it all,” he adds. 

St. Louis founded Elder Law, which more commonly goes by ELG Estate Planning, in 2006. The firm has grown to a 20-person practice and has law offices in Spokane, Kennewick, and Seattle, which focus on extensive issues dealing with elder law. She emphasizes that proper estate planning should also go beyond simple asset transfer.

The focus of ELG, she says, is also on asset protection, particularly for surviving spouses.

“Our estate planning documents are typically set up to protect assets when the first spouse dies, so that the assets of the first spouse pay to a trust,” she says. This is known as a testamentary trust, a trust that is created by the will and goes into effect after death. Probate, in this case, she says, plays a beneficial role by moving the estate into the trust and safeguarding assets for the surviving spouse, particularly in the event of long-term care needs. 

“There’s such a need for not just estate planning, but estate planning with a focus on how we help people protect themselves, protect their assets, how they deal with disability, and long-term care issues,” St. Louis says. 

But one of the most import issues, she reiterates, is keeping forms up to date.

“If people get divorced, they need to update their estate plan."