Summary: Assets with death beneficiary designations can be quite helpful, including as part of an overall estate plan that will avoid probate. In some circumstances, though, they may come with certain pitfalls that can create problems. In those situations, there may be a better way, or a different planning tool that will better meet your needs. With complete estate planning, possibly including the use of trust planning, you may be able to protect your family more effectively from those pitfalls.
Chuck and Terri’s story was, in many
ways, a tragic one. The couple married and had a son, Conner, who was born in
1997. Chuck was 43 and Terri 29 at the time. In 2009, doctors diagnosed Terri
with terminal cancer. A few years later, Chuck was also diagnosed with cancer,
and his was terminal as well. Chuck’s cancer was believed to be either more
aggressive or more advanced, because the doctors expected him to die before
Terri did. However, in the fall of 2013, Terri died suddenly and somewhat unexpectedly
at age 45. Chuck lived another 10 months before passing away at age 60.
This unexpected series of events, and
the order in which they occurred, mattered a great deal. Terri had a $600,000
life insurance policy. Chuck was the beneficiary under the policy. However,
shortly before she died, Terri changed the beneficiary designation to name her
sister, Amanda, and Chuck as co-beneficiaries. According to Amanda, she and
Terri both promised each other that, if anything happened to either of them,
the survivor would take care of the deceased sister’s kids. At the time,
though, Amanda had no idea that Terri would name her as a co-beneficiary of the
life insurance policy.
After Terri’s death, Chuck became
concerned that Amanda was not going to use the life insurance money to take
care of Conner, even though she had promised to. He went to court, asking the
judge to place $270,000 of the life insurance proceeds in trust. (Chuck
asserted that Terri wanted Amanda to keep $30,000 for herself and dedicate the
remaining $270,000 of her half to Conner.) In court, while on the witness
stand, Amanda actually asked, “If it’s my money, what does it matter what I
spend it on?”
The trial judge sided with Chuck, but
the state court of appeals eventually ruled for Amanda. The problem was that a
life insurance policy is legally a contract and the law is very specific that,
if a contract is clear and not ambiguous, then it should be carried out as
written. In this case, the insurance contract was clear that, when Terri died,
the insurance company was to pay $300,000 outright to Chuck and $300,000 outright
to Amanda. Whatever promises Amanda and Terri had made to each other, whatever
documents Terri had handwritten stating her wishes… they were all irrelevant.
The insurance policy beneficiary designation form clearly said that Chuck and
Amanda were co-beneficiaries. That was all that mattered.
There was ample evidence that this
outcome may not have been what Terri truly wanted. There was evidence that
Terri’s main focus was to provide for Conner. Almost certainly, Terri did not
want Chuck, in his final months, to have to fight a court battle with Amanda
over the life insurance money. The actual outcome of this situation certainly
did not achieve those goals.
In many cases, there is a better way.
One option would be the use of trusts as part of an estate plan. If, for
example, someone like Terri wanted to dedicate her wealth to providing for her
minor child, and was also dealing with the uncertainty of a terminally ill
spouse, a trust might have done a better job achieving those goals. A person in
a situation like Terri could, for example, choose to create a trust and name
that trust as the beneficiary of the life insurance policy. This would then
allow for greater flexibility. You could name your terminally ill spouse as the
trustee of the trust but also name someone like a trusted sibling as the first
successor trustee in the event that your spouse dies or becomes incapacitated.
You could also, if you have a child in their mid teens (as Terri did,) create
provisions in your trust to delay some or all of the distribution of the money,
so that your child doesn’t receive a six-figure lump-sum of money on his or her
18th birthday. The trust could clearly state whom the funds were to
benefit, such as stating that the trust was for the benefit of your spouse during
the spouse’s lifetime and for your child thereafter.
Assets with death beneficiary
designations can be useful tools in estate planning and avoiding probate.
Sometimes, though, there is a better way. That’s why it helps to plan carefully
with the help of an experienced estate planning attorney.
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