Two Tales from the Darkside
By John H. Robinson, Financial Planner (Feb 27, 2024)
I always preach that there is much more to estate planning than merely drafting your health care directives, financial powers of attorney, wills, and trusts. How you title assets and assign beneficiaries has important ramifications – or sometimes consequences - as well. Even for the few rare families I encounter who have overcome inertia and procrastination to get their document ducks in a row, maintaining and updating these documents over time is challenging and it is all too easy for important matters to fall through the cracks.
eMoney is the financial planning platform we provide to all clients to make this task manageable. Specifically, we create shared document folders for you to upload your account statements, deeds, insurance coverages, employee benefits, estate planning documents, tax returns, and beneficiary forms. While uploading these documents requires some time and effort on your part, once we have the data, we are often able to identify planning mistakes and oversights.
When we are reviewing client documents in eMoney, missing beneficiary documents represent the low-hanging fruit in our list of findings and recommendations. In particular, we routinely find mistakes and oversights concerning employer-sponsored retirement plans, pensions, and group life insurance. In this article, I will share two recent examples that should drive home the importance of maintaining these records.
Case #1 – Pension Denied!
Last year, a long-time client passed away shortly before her planned retirement date. She was unmarried and listed her siblings as beneficiaries in her estate planning documents and account beneficiary designations. She had also been diligent in uploading her employee benefits information, which made it easier for her siblings to navigate the claims process. However, when her siblings contacted the pension administrator, the support rep informed them that there would be no benefits paid because benefits could only be paid to a spouse. Escalating this matter to an issue to a supervisor generated the same response.
Fortunately, the employee benefits handbook that had been uploaded to eMoney specifically permitted non-spouse beneficiaries in the event of death prior to electing to receive pension benefits. However, when the siblings provided this information to the pension administrator, the shocking response was that they did not have a beneficiary designation on file! Fortunately, a copy of the original signed designation had been uploaded to eMoney many years earlier. Absent those documents, the more than $300,000 pension distribution to the siblings would not have happened.
Case #2 (In)Human Resources
Another long-time client passed away suddenly at the end of last year leaving a grieving wife (also our client) and daughter behind. He had been an employee of the post office and participated in the Federal Employee Retirement System and postal employee benefits plans. In this case, our client had not gotten around to uploading many important documents, including beneficiary designations. Fortunately for his family, the Federal Office of Personnel Management determined that his wife was the primary beneficiary on his Pension and employer death benefit. Thrift Savings Plan made the same determination and assisted in rolling the plan into a spousal beneficiary participant account (similar to a spousal 401(k) rollover).
However, when our widowed client contacted the Office of Federal Employee Group Life Insurance (OFEGLI) – a division of Met Life that assists in processing FEGLI death claims – she was told that she needed to contact the Post Office HR department to have them send the beneficiary form to OFEGLI. When she called HR, her response was a simple, “You are not the beneficiary. We can provide no further information.” She called multiple times and also spoke with a supervisor, but each time the response was the same. They could only confirm that she was not the named beneficiary.
According to my client, her husband had updated his beneficiary designation multiple times during his nearly 40 years with the post office with the two most recent instances being after their marriage in 1998 and again after the birth of their daughter in 2000. Unfortunately, in going through her husband’s old files, the only copy she could find was an old form from the early 1990s that listed his long-deceased father and one of his siblings as equal beneficiaries.
Since I have some familiarity and experience in navigating federal benefits, I knew that there are a few limited circumstances in which the statutory beneficiary ordering might potentially supersede a named beneficiary designation. Under the rules established by Congress for federal employees, in the absence of a named beneficiary, a surviving spouse is automatically deemed the sole primary beneficiary.
Through a series of conference calls to Post Office HR, we managed to find a supervisor who agreed that it could still be possible for statutory ordering to apply, particularly if one or more named beneficiaries were deceased. With this foot in the door, the supervisor was then able to confirm that the early 1990s beneficiary designation that our widowed client had found in her husband’s files was indeed the most recent beneficiary designation on file with HR. Since the father-in-law was deceased, the widowed client's sister-in-law is the surviving named beneficiary. As such, the sister-in-law is fully entitled to the death benefit unless she voluntarily elects to disclaim. The death benefit on the policy was $400,000 and was intended to be used to pay off my clients’ mortgage and to pay for funeral expenses.
The supervisor who was kind enough to at least bring a resolution to this matter, also noted that all original paper beneficiary designations were destroyed decades ago when the post office elected to digitize all documents. It is certainly possible that the subsequent beneficiary changes referenced by our widowed failed to find their way into the post office's scanner. The supervisor also acknowledged that when the named beneficiary(ies) is deceased, the death benefit often goes unclaimed.
Lessons Learned
The most obvious takeaway from these two tales is that it is critically important to keep copies of original signed, dated beneficiary forms. A second important lesson is that employees should not automatically assume their employers will maintain their files over time. Lost documents happen much more often than one might imagine. Last, but not least, I hope these two case studies also demonstrate the importance of getting all of your important documents to your financial planner to review. I find major mistakes and oversights in virtually every review.
