Say you're a young couple, writing a will. Would you leave your money only to the children you have, leaving your future children out? Probably not.
Say you're a grandparent, whose will leaves everything equally to your adult children. If one of those children died before you did, would you reallocate his or her share to your other children? Probably not. That would cut out your grandchildren--the children of your child who died.
Yet the very thing you wouldn't do--cutting out grandchildren or future children--your insurance company or retirement plan is probably doing for you. Some of your descendants may wind up poorer than you meant them to be.
Here's what's going on and what you might be able to do about it.
When you buy life insurance or a tax-deferred annuity, or start a retirement plan such as an IRA or 401(k), you're given standard forms to sign. The forms ask whom you want as beneficiaries.
Typically, you put down your spouse's name or the names of your current children. That means no other people can be paid. Say you name your two adult children, Jim and Joe, as beneficiaries, and Jim dies before you do. Joe will get everything. Jim's share can't pass to his children--your grandchildren--because they weren't named.
Or say you name your daughter Betty as the inheritor of your small retirement plan. Later, Sue is born--but you've forgotten about that beneficiary form. Years pass, the plan grows large, then you die. Betty gets all the money. Sue always wonders why you cut her out.
Beneficiaries in this position often ask the retirement plan or insurance company to divide the money as you probably would have wanted. No way. They'll pay by the book. The children who received the money could share voluntarily with the child left out. (Check with your lawyer about how much can be given tax-free.)
On the other hand, maybe they don't want to give any money away. Greed and obligation clash. You'll have sowed anger in your family, when you meant to treat everyone the same.
You might think you can solve this problem by writing a will. Wills typically cover children not yet born. In most cases, they also pass money down each family line. If your adult son is dead, his children will inherit his share.
But wills don't cover any asset that has a named beneficiary, including joint property, life insurance, annuities and retirement plans. Each of these assets will go only to the people named.
When inheritances are misdirected, insurers and retirement plans blame you. "We advise that you look at your finances, including your insurance policy, yearly," Jack Dolan of the American Council of Life Insurers in Washington told my associate, Dori Perrucci.
He thinks that, if your adult son dies, you should instantly change your beneficiary designations, so that your son's children inherit his share. If you die before doing so, you're the one who cut your grandchildren out.
Lawrence Waggoner, professor of law at the University of Michigan in Ann Arbor, has a different take. He says that insurers and retirement plans are to blame.
If they wanted, they could give you some options on the beneficiary form. You could choose whether or not to include children born in the future, or whether your grandchildren could inherit your dead child's share.
The Life Office Management Association in Atlanta, an insurance trade association, even offers a standard form that insurers could use to include their grandchildren. Northwestern Mutual allows you to include future-born children and grandchildren. So do some retirement plans.
But most plans and insurers don't. "It's for their administrative convenience," Waggoner says. "They don't want to have to investigate who the grandchildren are."
How can you rectify this, so your own estate won't accidentally go astray?
You usually must get a lawyer to amend the beneficiary form. Seymour Goldberg of Goldberg & Goldberg in Garden City, N.Y., says he amends as many as 400 forms a year, at $350 each.
But many insurance companies and retirement plans won't accept amended forms. "In that case, go to another company," advises attorney Natalie Choate of Bingham Dana in Boston.
Don't let a stubborn insurer or retirement plan leave your family in a potential mess.
After you have amended the form, get a receipt from the company, acknowledging the specific change. Keep the amendment and receipt with your will. If the company loses the amendment, your family will need proof.