Jenny Rozelle, Host of Legal Tea
Cautionary Tales - Beneficiary Designations Gone Wrong! - Episode 36
Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is a cautionary tale, where we talk about a real-life case with real-life clients with real facts. Though, of course, names are altered for confidentiality purposes. So today, I’m going to talk about a variety of real-life examples where beneficiary designations have gone wrong. Very, very wrong. Though, before we dive in, I feel like I need to give some general and basic information on what I mean by beneficiary designations…
When I say that term of art, beneficiary designations, I am NOT talking about “Oh, who is the beneficiary of your Will or Trust?” Instead, I’m talking about how some assets allow you to put beneficiaries right on the asset – so, you know how you can list beneficiaries on your retirement accounts … or life insurance … even your house (in some states).
Let’s talk about the advantages versus the disadvantages of beneficiary designations – advantages, first. Beneficiary designations allow for a nice clean way to avoid probate. Probate, the court process that gets assets from point A to point B, only governs assets that are 1) in one person’s name and 2) have no beneficiaries designated. Because so many individuals have beneficiaries designated on assets like retirement accounts and life insurance, those assets pass free of probate. That’s great! Wahoo!
There are sometimes disadvantages, though, when you 1) fail to keep your beneficiaries updated; 2) there’s an unintentional conflict between “who” you list as beneficiary on your asset versus Will or Trust; and/or 3) your beneficiaries have things going on in their life that maybe you don’t want them to freely inherit. More on that in a bit. Soooo, today’s cautionary tale episode is about these things I just listed and real-life examples where I’ve seen take a sharp left turn. We’ll tackle them one-by-one, and in the order I listed them in.
1) Failure to Keep Beneficiary Designations Updated
One of the classic “cautionary tales” that I share in regards to this topic is one I worked on a handful of years ago. So, here we go…
A gentleman passed away and his sister was the estate representative (the personal representative/executor). It was a fairly straight-forward case at the beginning. If I remember correctly, he had a house; a few small bank accounts; some personal property. Because the value of everything, though, we had to open a probate estate. Things were going well … we were smooth sailing! Then, one day, I got a call from the sister and I thought it was just going to be a “Hey, where are things now? How are things going?” sort of conversation. Noooope.
I often tell the estate representative to forward the deceased person’s mail to them because that is one way to ensure bills are being taken care of, and sometimes we find out about assets that maybe we didn’t know existed. So, I hopped on the phone and she proceeds to tell me she received a statement in the mail for a retirement account and she “wasn’t sure what she was supposed to do with it.” Well, as you likely know, retirement accounts often have beneficiary designations on the account. So, I told the sister, “Okay, well we need to find out if there is a beneficiary designation on the account, so give the financial institution a call and check on that. When you have that information, give me a call back.”
Back in my early days, I wasn’t as cynical as I am now – so at that time, I didn’t really think too much about it. I hung up and moved on. A few hours later, I got a call from the sister and she says, “Hi Jenny, I called the company and they said Susie Smith is on the retirement account as a beneficiary. Susie was his ex-wife, so won’t the Will just override that and those funds go to his kids?” I immediately paused, collected my thoughts, and calmly replied, “I’m so sorry to be the bearer of bad news, but the beneficiary designation trumps the Will, so that account is going to Susie.” That wasn’t a fun thing to deliver.
Thankfully, the account was only like $15,000 or something fairly minimal, but hey, a chunk of change nonetheless. Heck, I’d take a free $15,000! Anyway, the sister proceeded to inquire about “how?” and “why?” … I, unfortunately, had to explain that we’re left with what her brother left, and we can’t ASSUME that her brother did not want those funds to go to his ex-wife. Maybe they were amicable. Maybe they weren’t. Nonetheless, in my little estate law world, assuming is a no-no. We cannot just make things up to benefit ourselves. That could get her, the sister, in trouble and heck, even me in trouble.
So, yeah friends, check those beneficiary designations! I’ve seen accounts and assets go to ex-spouses, ex-partners, parents over children, etc. Let this cautionary tale be a lesson for you! Okay, moving on…
2) Unintentional Conflict between Beneficiary Designation & Estate Plan Document
This is along the same lines as the prior “cautionary tale” I just shared, but if there’s a conflict between a beneficiary designation and the estate plan document, the beneficiary designation wins. You know, all too often do I uncover people that think that doing estate planning like a Will, Trust, etc. allows them to throw on their superhero cape and “clean up” all their assets/accounts. This conversation often comes up when I FIRST meet with a prospect or client … and I’m going over what all these estate planning documents are (in my little world), what they do, when they “activate” … it’s a very natural segway when I bring up talking about a Will or Trust because it’s critical that you get your assets to play nice with your Will or Trust.
So, here’s our second cautionary tale for this episode – A couple years back, I tragically worked on a case that involved someone that passed away that was YOUNG – in their early 40s and she, who was a single Mom to 2 awesome kiddos, awesomely (good, girl!) had done a Will in case something were to happen to her. Her biggest asset was a life insurance policy. She rented (so she didn’t own a house), she had a small bank account, and so her total estate value didn’t rise to the level of needing probate. I was meeting with HER Mom about “what to do” following her daughter’s passing. It was heart-breaking, to say the least, and by the end of the meeting, somehow it got even worse.
I was talking to her Mom about each asset one-by-one when we got to the life insurance policy. She shared it was a term life policy and the death benefit was $1M. (Side note: Term life insurance policies, even ones for $1M, are actually fairly affordable.) Anyway, I inquired about its beneficiary designation. She said, “For some reason, she has me and her Dad on there as 50/50 beneficiaries, and not the kids on there.” Her Will, of course, left everything to her children. Yet again, I get the be the bearer of bad news and I share that the life insurance policy is going to her and the girl’s Dad – and not through the Will (which would go to the kids). That’s when she laid it on me, “Oh my gosh, Jenny – Her Dad is estranged and they hadn’t talked nor did they have any relationship for 10+ years.”
Guess what happened? The girl’s Mom got 50% and handed it over to the girl’s kids. The Dad? He claimed his 50% and after multiple attempts to contact him, he never replied and got to pocket his 50% (um …. $500,000) … meaning he didn’t share it with the kids, which were his grandchildren technically-speaking (but again, there was no relationship there). WOW, right? I still think about this situation often and it makes my stomach flip every single time.
Alright, on to our last topic…
3) Unintentional Effect/Outcome on Beneficiaries
What do I mean by this, you ask? Well, I always say that in my little estate and elder law world, “If it sounds too good to be true, it very likely is.” Most things in my world may sound awesome, but there may be a little catch. So, here’s a perfect example of what I mean – So often, people get hyper-focused on ensuring beneficiaries are designated on assets/accounts that they fail to take a 50,000 foot overview of the literal outcome of things. I mostly see it with financial advisors, honestly, and not to pick on them, in all seriousness, but how and why would they know the legal effect of some things? They’re not trained attorneys, after all!
Anyway so, there’s a whole lot of people that will put in the time and effort to make sure beneficiaries are designated on assets for the SOLE purpose of ensuring probate is avoided. Which hey, that is WONDERFUL! However, what did I say just a second ago? If it sounds too good to be true, it probably is. Well that applies here. I’m really looking at you folks that have minor kiddos or beneficiaries, special needs kiddos or beneficiaries, beneficiaries that have stuff going on in their life (addictions, divorce, creditor issues, bankruptcy, etc.). If they inherit outright through a beneficiary designation, that means: 1) those minor kiddos/beneficiaries get their hands on the full sha-bang come-18 years old; 2) those special needs kiddos/beneficiaries may lose their governmental benefits like Medicaid; 3) those beneficiaries that have ‘stuff” going on … outright money could fuel their addiction, could get tossed into the divorce, creditor, or bankruptcy proceeding. ALL YIKES!
There ARE ways to protect your beneficiaries from this happening, but it’s likely going to involve 1) a thorough conversation with an estate planning attorney, and/or 2) more estate planning than maybe you originally thought you needed – i.e. a testamentary trust or living trust. One of my favorite things I hear all the time from prospects, friends, clients, etc. is, “Jenny, I just need a REAL SIMPLE Will – nothing fancy … just REALLY SIMPLE.” Well, I hate to burst your bubble – but there’s no such thing. Can a general practice attorney throw one together for you? Sure thing! Will some attorneys agree to put together a ‘really simple Will” for you? Yep. But if you choose to go down that path, remember this episode, remember these cautionary tales, and perhaps reconsider who you’re working with. They may not be skilled in estate planning – and may be doing you a disservice. Not maliciously; they just don’t know what they don’t know.
Alrighty … I’ll get off that soapbox now and we’ll wrap up this episode. Next week, we are back to the current events/current trends topic -- something I’ve seen or run across that I think would be interesting on here. During that episode, we’re going to be talking about a recent article I stumbled upon regarding unclaimed property – it’s fascinating stuff, friends. So, until then, Legal Tea Listeners…be well and talk soon!