Beneficiary Designation Landmines

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Many clients believe that their Will or Trust will control absolutely all their assets. Unfortunately, this may not be true if your beneficiary designations are not coordinated with your Will or Trust. Many brokerage accounts in Illinois now have designated beneficiaries by “transfer-on-death” payees.

While these arrangements are superficially appealing, they can present catastrophic results at death if they are inconsistent with your Will or Trust.

The following examples may serve to illustrate the unfortunate consequences of not coordinating beneficiary designations, account ownerships, etc., with your Will or Trust.

EXAMPLE 1– Joint Accounts

Widow Sally had three children. She loved them all equally. Her Will left everything to them equally. However, as a matter of a convenience, she added one of the children on all of her bank accounts as a joint tenant. She did this so that there would be “someone to pay her bills” if she became ill. Sally then died. The child who was titled on the accounts as a joint tenant kept all of the money for himself. The other children took nothing. The joint ownership account TRUMPED the Will. Sally should have kept all of her accounts in her name only. She should have named a trustworthy person as agent under power of attorney to pay her bills if she became ill. Powers of attorney do not give anyone ownership rights. Avoid joint tenancies with anyone other than your spouse.

EXAMPLE 2 – Annuity Beneficiary Designations

Seymour G. Fockwatt was a successful retiree. He had children from his first marriage, and a much younger second wife named Floozie. In order to protect his assets for his children, yet provide for the support of Floozie, after his death, Seymour had his attorney prepare a Trust which provided income for Floozie for life. At her death, the Trust provided that all assets would then pass to his children from his prior marriage. After his Trust was created, Seymour bought a $500,000.00 annuity. His insurance agent filled out the beneficiary designation naming Floozie as the sole beneficiary. Seymour then died. His children were not happy when they learned that Floozie would get the annuity outside the Trust, and they would never see the money. The annuity beneficiary designation TRUMPED the provisions of the Trust. Seymour could have avoided this result by naming his Trust as beneficiary of the annuity. Since he relied on his insurance agent, his estate plan was frustrated.

EXAMPLE 3 – Transfer-on-Death Brokerage Accounts

Joe and Mary had one child named Chris. Mom loved Chris, but Dad viewed Chris as irresponsible. Therefore, Mary wanted to make sure that Chris received a substantial inheritance from her, even if Joe survived. Therefore, Mary created a Trust that left $600,000.00 to Chris even if Joe survived. After creating the Trust, Mary met with her stock broker and created a “transfer-ondeath” brokerage account naming Joe as the primary beneficiary. Mary then died. As a result, the transfer on death beneficiary designation TRUMPED the terms of the Trust and the money passed to Joe. There were no other assets to pass through the Trust to Chris and Chris therefore received nothing at Mary’s death. Mary should have named her Trust as the beneficiary of the brokerage account.

EXAMPLE 4 – Life Insurance (Predeceased Child Problem - Not Per Stirpes)

Seymour prepared a life insurance beneficiary designation for himself that named his four children as beneficiaries. Unfortunately, one of his children died before him. The deceased child had two children. Seymour assumed that the share of the deceased child would pass to his two grandchildren. Unfortunately, the form Seymour submitted to the life insurance company provided that the life insurance would pass to his “surviving children” rather than to the children of a deceased child. Therefore, his life insurance was split in three shares among his three surviving children, and his grandchildren took nothing. Seymour should have had his attorney complete a personalized beneficiary designation consistent with Seymour’s wishes. Instead he incorrectly relied on the insurance company’s standard form which effectively disinherited some members of his family.

The morals of these stories:

  • You should never complete a life insurance, annuity, 401(k), IRA or other beneficiary designation without my review.
  • You should never create a joint account with anyone other than your spouse without my review.
  • You should never create a “transfer-on-death” brokerage account without my review.
  • You should never create a “pay-on-death” bank account without my review.