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  • Writer's pictureJenny Rozelle, Host of Legal Tea

Cautionary Tales - Issues with Beneficiary Designations - Episode 109


Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode is a “cautionary tale” topic/type of episode and usually on these episodes, we go into a real-life, real-client story that I, or my office, has worked on – that usually is a messy-something that happened, and that you should learn from. Well, today is a topic we HAVE discussed before here on Legal Tea, but as I mentioned in my last episode (when I give a sneak peak at the following week’s episode topic), I keep having mistakes and issues with beneficiary designations land on my desk, so I guess I’ll keep talking about how vital it is to stay up-to-date on beneficiary designations … to maybe, just maybe, lessen what is landing on my desk! So yeah, today we’re going to be going through some stories where there have been issues with beneficiary designations. Two are going to be real-life happenings (like beneficiary designations gone very wrong) and one is going to be advice a client received … that I massively disagree with.

Alrighty, first one is: 1) Failure to Keep Beneficiary Designations Updated

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…

The second one is: 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.

Finally, the third one, if you remember, is not one that has happened, but rather advice a client of mine received – that I massively disagree with!

Okay, so I met with a prospective client, a husband and wife, a few weeks ago and they shared that they were talking to some family members last Christmas, and the family members were talking about “avoiding probate” through beneficiary designations. So, after that conversation, they thought that they should put the wife’s brother as their contingent beneficiary on life insurance policies and retirement accounts since the wife’s brother would be guardian of their children if something happened to them. SO, to clarify, they’d be each other’s primary beneficiary – but if something happened to both of them, they had the wife’s brother designated as the contingent/next beneficiary.

When they shared this idea with me, I immediately thought to myself, “Oh no – that’s a really, really bad idea!” and I really don’t think I have the best poker face anyway, so once they saw the look on my face, I think they knew what was coming! I proceeded to explain that if something happened to them (and granted, the likelihood of something happening to them is SLIM – but the purpose of estate planning is to minimize risk, yeah?) … anyway, I proceeded to explain that if something happened to them, a couple things come to mind: First, said wife’s brother may not *actually* get appointed. When you nominate a guardian in your estate plan, the Judge still has to agree with the appointment – so what if the Judge disagrees and you just sent money to the person who is not even the kids’ guardian?

Another reason it’s a bad idea is … okay, let’s pretend the wife’s brother DOES get appointed, what if the brother, since now he’s walked into a pile of money, gets a little … greedy … and decides to say “heck with sharing with the kids – he’s off to travel the world or go to Vegas!” That sounds crazy and unlikely to happen, but I can promise you I’ve seen things like this play out – even in families I would have NEVER thought it would happen. A final reason I’ll share that I don’t agree with this strategy is … say they forget to update the beneficiary designation, the kids get older, and then they pass. And say the brother is actually totally fine and agreeable to handing the money over to your kids if you pass. Well, guess what? Now, you’re going to punish him for actually being a good guy and NOT going to travel the world/go to Vegas, because getting the money over to the kids is going to be subject to gift tax rules. So, for these three reasons + probably even more, I don’t think that strategy is a good idea AT ALL – when, in reality, you can make “what” they’re trying to do (avoid probate) through estate planning devices, like a Revocable Trust, without the significant risk.

So, like I said at the beginning of the episode, I’m going to keep shouting from the rooftops about beneficiary designations – and especially how easy they are to mess up on from an estate planning perspective. At least, I stop having so many messes like these described today land on my plate at the office. All of these are examples of making sure all the professionals in your life – the estate attorney, financial advisor, insurance agent, accountant, etc. – are all on the same page and working TOGETHER.

I’ll talk to you next week, my friends. Have a great week and talk to you soon. Bye bye!

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