No will? This 5-minute step can avoid legal headaches for your heirs

Zappos co-founder and former CEO Tony Hsieh died in late November from injuries sustained in a house fire. The multi-millionaire had no will, leaving a judge to appoint family members to administer his unplanned estate.

Wills are something people must be proactive about, which is why many people do not hire a lawyer and write them. But a lot of what happens to your money is determined by a separate protocol, the beneficiary system built into most banking products.

Setting account beneficiaries for bank accounts, retirement accounts like 401(k) and IRAs, and brokerage accounts is neither time consuming nor does it require a person to be proactive. Typically, the digital platforms of these accounts will nudge clients to fill them out and regularly update them.

Still, tons of people don’t do this. Fidelity told Yahoo Finance that 48% of their 401(k) and 403(b) holders do not have this filled out, slightly better than September, when that number was 53%.

This has become a critical part of estates. For somebody who has a good chunk of money tied up in investments or in bank accounts, the destination of all of these assets upon the death of the owner goes to the person whose name is typed into the form. And if a person doesn’t have real estate or they have a lot of money, the beneficiary system may end up being more important than the will.

According to an NYU Law Review paper "Accidental Inheritance: Retirement Accounts and the Hidden Law of Succession,” the beneficiary typed into Fidelity, Vanguard, Bank of America, or whatever bank or platform, often takes precedence over the will.

“Most often, not the account holder’s will or trust, but a one-page fill-in-the-blanks beneficiary designation form that the account holder filled out, typically without advice of counsel, when she or he opened the account,” the paper says.

Fidelity confirms this in a customer service page, writing: “We'll distribute your assets to your beneficiaries without requiring a will or other legal documents.”

“Having good beneficiary information on file can not only avoid disputes, but can speed the transfer of assets even when the transfer is straightforward,” the company told Yahoo Finance.

Even though it’s quick, it needs to be a considered choice

The choice of beneficiary in a bank or investment account, the paper points out, was likely made without legal advice or even without estate planning as the primary objective, because money management is usually foremost in the mind when you’re on Fidelity or Vanguard. This means that these beneficiary forms are often not given the same level of thought as wishes in a will context, and may not even be changed or updated to reflect wishes that might be in wills.

Writing for the personal finance website The Balance, certified financial planner Dana Anspach explained that even if the beneficiary isn't updated to what the will says but the person decides to honor the wishes, there could still be trouble. For example, someone who gets the contents of their spouse’s 401(k) but plans on distributing it to the children (as the deceased actually wanted in the will) would have to report the entire sum on their tax returns — resulting in the government taking more of the inheritance.

"This problem, which has already spawned a significant volume of litigation, will become exponentially worse over the coming decade, as more holders of substantial accounts reach the end of their life expectancy," the NYU paper notes. "Reform is critical."

It may be painless to get these forms filled out — literally a job of five minutes or less — but it’s important not to dismiss the notifications from the bank to keep it current. And, Fidelity notes, it’s critical to tell the person whom you’ve identified.

“Please tell your family or friends if you've selected them as a beneficiary,” the company writes, “because your beneficiaries must contact Fidelity themselves to receive their assets.”

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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