Some valuable pieces of an individual’s estate do not pass pursuant to their estate planning documents, and this portion of one’s overall Estate “Plan” is often overlooked. These assets typically include: Life Insurance proceeds, Retirement Plans Accounts, IRAs, and most all other accounts held at financial institutions. This major portion of an individual’s estate plan is often overlooked and should be given careful consideration over and above just making sure you wrote someone’s name on the “designated beneficiary” line.
In a simple example, an individual should always promptly review beneficiary designations subsequent to any life-changing event, for example divorce. There are far too many sad stories out there of an ex-wife or ex-husband receiving the balance held in an ex-spouse’s bank account upon the death of the ex-spouse when the intent was for a child/children to receive those account proceeds. The financial institution holding the account only has an obligation to follow the “contract” it signed with the account holder to pay the balance to the beneficiary designated by the ex-spouse at the time this “contract” was signed, without any obligation to consider life-changing events such as divorce. And although some states have passed laws that require an ex-spouse to be treated as pre-deceasing the decedent (and therefore not a designated beneficiary), Tennessee has no such law; and even if Tennessee does pass such a law in the future, for certain accounts governed by federal law/ERISA, state law would be pre-empted. In a specific example involving the beneficiary of a life insurance policy, the Tennessee Supreme Court in a decades-old opinion held that an ex-spouse designated as the beneficiary of a life insurance policy can recover those proceeds despite the fact the ex-spouse’s divorce from the policy holder was final 34 days prior to the date of death.
For further example, it is not as simple as naming one’s Estate as the beneficiary of a 401(k) retirement plan account either and trusting that one’s estate planning documents will divide the account balance among designated beneficiaries. Federal law (ERISA) provides that a surviving spouse will inherit the balance of such a retirement plan unless the surviving spouse files a waiver of his/her rights. So even if an individual drafts a Will that designates a child to receive 100% of this type of retirement account, by designating the Estate as the beneficiary without obtaining consent of his/her spouse, the individual’s Estate Plan (100% to Child) will not be given effect due to federal law (ERISA). Even if the Child had been designated to receive 100% as the pay on death beneficiary, federal law (ERISA) mandates the surviving spouse receive that benefit, regardless of the beneficiary designation, unless a waiver is executed. It is imperative that any married individual bring his/her spouse in on the decision to make any beneficiary changes on any account governed by ERISA such as the typical 401(k) account.
The simple lesson to be learned is review your beneficiary designations after every major life-changing event, know who you have designated as your primary and secondary (contingent) beneficiary(ies), and discuss these designations with your estate planning attorney to confirm that if something unfortunate were to happen to you, your wishes would be carried out as you intended.
Kevin Dean practices in the areas of Probate, Estate Planning, Bankruptcy, Business Litigation, Real Estate Litigation, Media Law, General Civil Litigation and Tax Law, including preparation of tax returns. As a licensed CPA, his combined background in accountancy and law ensure clients extensive, knowledgeable representation that is customized for each individual case. Kevin has appeared in numerous levels of state court and is licensed to practice in the U.S. Federal District Court for the Eastern District of Tennessee and the U.S. Tax Court. He enjoys using his merged backgrounds to help businesses and individuals analyze their situations. Kevin brings a highly beneficial skill set to the table for all his clients.