Yes, you read it right. My guess is you may have wishes to the contrary, so read on, lest you unwittingly create a situation that is likely to be 100% “unfixable.”
If you are like most people, a large part of your wealth may consist of “non-probate” assets: assets not controlled by a written Will, but instead controlled by a “Beneficiary Designation” or “Pay on Death” directive which directs who will receive that asset at your death. Common examples of non-probate assets include life insurance policies, annuities, 401(k) plans, and Individual Retirement Accounts (IRA’s), as well as survivorship bank accounts.
A Beneficiary Designation form is provided when you purchase the asset, but in most cases, the Beneficiary Designation can be revoked or amended at any time, as many times as you like. The good news about non-probate assets is that the asset goes directly to your named beneficiary shortly after your death with no formal probate or estate administration required. The bad news is that the Beneficiary Designation is basically “set in stone,” meaning that no matter what your Will says, it will not help in the case of your non-probate assets. They will go as directed, even if it is to an ex-spouse.
Why are these directives important? Consider the angst and frustration of Muchyounger Spouse, the grieving widow of Grumpy Spouse, who consulted with her estate attorney shortly following the death of Grumpy. She came well prepared, with the original Will, a death certificate, and a list of all assets and accounts owned by Grumpy. One of the assets, a life insurance policy providing a death benefit of three million dollars, would certainly come in handy as she was worried about how she would make it financially without his earnings. However, Grumpy Spouse took out this policy while married to Frumpy Spouse, and named her as his primary beneficiary. When Grumpy and Frumpy divorced, he was advised to change the Beneficiary Designation immediately to remove Frumpy as beneficiary. However, he was already busy planning his wedding to Muchyounger and was so ready to move on that it slipped his mind, never to get done.
Imagine the estate attorney’s discomfort at having to be the bearer of this news to Muchyounger, who insisted that the divorce must have voided that Beneficiary Designation. However, unlike the provisions made for a spouse in a written Will, which are automatically revoked by state law upon divorce, Beneficiary Designations are governed by your contract with the company, and the company must pay the funds out to the current beneficiary on file.
The only “fix” for this situation is for the current beneficiary to either disclaim her interest and allow the funds to pass to the estate or to take receipt of the funds and then gift them to the person who should have been named. In other words, the ex-spouse would have to agree to allow the money to go to the current spouse. In this case, Frumpy was quick to point out that she had put up with a lot of Grumpy’s shenanigans during their marriage and that she considered the three million dollars to be her just reward for all that she had been through.
Not divorced and not planning on it? Great. Your Beneficiary Designations probably designate your spouse as your primary beneficiary and your children as contingent beneficiaries should your spouse predecease you, as was the case for Cletus and Cleo Client, who thought they had attended to each and every detail for taking care of each other and their children.
Tragically, Cletus and Cleo died simultaneously in a plane crash. The Executor appeared at our office and produced the original wills which contained a very well written, carefully planned trust that would ensure their wealth would be held and managed for their 16 year old twin daughters until they reached the age of 30. The most significant source of the family wealth came from the couple’s life insurance policies and retirement accounts, all of which named the children as contingent beneficiaries. The Beneficiary Designations did not name the trust as beneficiary, so by law, the funds came to the twins upon reaching age 18. Upon their 18th birthday, as they each received a check for $1.5 million, the twins were last heard shouting “woo hoo!” and walking out of their attorney’s office with their boyfriends.
Good estate planning should never overlook attention to Beneficiary Designations. It only takes a few minutes to check the beneficiary and make any changes with a simple form, oftentimes online, so the change is processed immediately. As with your Will, you should also review these items from time to time to ensure they are still accurate and reflective of your wishes.
For more information or a consultation appointment, please call our Estate Planning Department at 704-892-1699.
Author: Amy Isaacs, Attorney
The McIntosh Law Firm, P.C.