One of the most overlooked parts of the estate planning process is ensuring that accounts or insurance policies have the proper beneficiary designations. A beneficiary designation means that after one’s death, money in an account or from an insurance policy will be distributed directly to someone (the “beneficiary”) listed on the account.
Checking beneficiary designations is important because the money from that account or insurance policy will go directly to that beneficiary (outside of the probate process regardless of what a validly executed Last Will and Testament states).
There are a few common examples that show how beneficiary designations can drastically change one’s estate plan.
Example 1: Predeceased child
Al was married to Kathy, but Kathy passed away before Al. They had two children during their marriage, Bob and Bill. Bob and Bill each get married and they have one child each. Bob passes away before Al, surviving are his spouse and child. Then Al dies.
After Kathy’s death, Al obtained a life insurance policy for $250,000. The beneficiary designation on his policy is: “To my children”.
Although it was probably Al’s intent that should either of his two children pass away before him, that the proceeds be split equally between his surviving son and his deceased son’s child, the likely outcome will be that Bill receives the total $250,000 to the exclusion of Bob’s child.
The beneficiary designation only read “To my children” and many life insurance companies will interpret this phrase to mean to the children only if they are living. If one child has died, then the surviving child will receive the proceeds.
This unintended result could have been avoided if the beneficiary designation was properly drafted. Please be aware that most life insurance companies have different rules for how to word the designation. Thus, it is important to contact the company on a case-by-case basis to determine the proper wording in your case.
Example 2: Ex-spouse windfall
John and Mary are married. They had three children during their marriage. John and Mary later get a divorce. During the marriage, Mary obtained a life insurance policy. When she purchased the life insurance, she named John as the primary beneficiary. After the divorce, Mary had her Last Will and Testament changed to leave everything to her children and specifically excluded John from receiving anything from her estate. Mary then dies, surviving are John and the three children.
Although Mary’s Last Will and Testament excluded John, he was still the primary beneficiary under the insurance policy. Therefore, John will receive the life insurance benefits if he applies to receive it.
This counterintuitive result can be understood due to the fact that a life insurance policy is a mere contract between the insurance company and the insured. According to the contract, John was the beneficiary and the insurance company is bound to make the benefit check payable to him.
This same example can relate beyond the common ex-spouse example to other situations as well: jointly owned real estate, living trusts, testamentary trusts, estate tax planning, payable on death, transfer on death, etc.
The prudent way to cure these unintentional results is to check the beneficiary designations on your accounts and insurance policies. Checking beneficiary designations is an ongoing process. When a new account is opened or a new insurance policy is purchased, it is recommended that you contact your attorney at JBN to discuss how to best title the account and list the beneficiary designations.
Author: Brian F. Johnson (bjohnson@peorialawyers.com)
Nothing in this article should be relied upon as legal advice. Please consult an attorney for advice tailored to your specific factual situation.
