CAUTION! Your Beneficiary Designations on Bank Accounts, Life Insurance, and Other Assets May Defeat the Goals Set Forth in Your Last Will or Trust
Do you own funds ($$$) held in joint accounts or property where you have a named beneficiary?
If the answer is “yes,” these accounts and your property will not be distributed in accordance with your Last Will. Instead, all jointly owned property and accounts will pass to the surviving joint owner, and all assets with a beneficiary designation will pass to the designated beneficiary.
If you have a joint account(s) with one or more of your children, the funds in that account will pass to that child(ren) at your death, regardless of what your Will might say about it, unless the account was set up as a convenience account whereupon it will become part of your estate and distributed according to your Last Will. You should carefully review the ownership and beneficiary designation(s) of all of your investments and funds to be sure that each will be distributed at death to those you intended.
Are the designated beneficiaries under your Last Will correctly named? Designated beneficiaries are the people (heirs) who receive all or a portion of your estate after (i) the debts, expenses, and taxes of the estate have been paid, (ii) any specific bequests have been distributed, and (iii) any joint accounts or any assets with beneficiary designations have been distributed to the named joint account holders. You should carefully review your estate planning documents, especially your Last Will, to confirm that your beneficiaries are accurate. If one of the named beneficiaries has died or is to predecease you, does that beneficiary’s share pass to his or her children (your grandchildren), your other children, or otherwise? This is a very important point to discuss with your estate planning attorney.
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The Story of a Real-Life Disaster Caused by Not Focusing on Correct Beneficiary Designations
Several years ago, I reviewed the Last Will & Testament of a husband who had died, leaving a 401 (k). This was the husband’s second marriage, and he had two estranged sons from his first marriage. While single following his divorce, he changed the beneficiaries of his life insurance and 401k to his sons when their relationship was good.
After his second marriage, the husband and his new wife bought a home together. They asked the real estate attorney who handled the purchase to draft a new will for them as well. The husband listed the assets he wanted to leave to his sons and those he wanted to leave to his wife. He wanted his 401k to go to his wife. Unfortunately, the attorney didn’t understand the difference between probate and non-probate assets. She wrote the will stating that the husband intended to give his 401(k) to his wife, but the attorney didn’t realize that the will would have no legal effect because the beneficiary designations on file with the 401(k) plan’s custodian listed the sons from the first marriage.
When the husband died, the wife received a big surprise when she was told that she had no interest in the $500,000 401(k). Why? Because a will doesn’t control the distribution of any of your assets with a beneficiary designation that does not name your estate. Property such as life insurance, annuities, brokerage accounts, and retirement accounts passes to the person you have designated as a beneficiary through the life insurance, annuity, brokerage, or retirement account custodian(s). Other types of property that pass by operation of law include jointly owned accounts with a right of survivorship, and real estate and bank accounts jointly owned by two or more people. When the first owner of a joint account dies, the property automatically passes to the surviving co-owner(s). It is irrelevant what the Last Will says.
That is what happened here. The 401(k) was paid to the named beneficiary (his estranged sons) according to the beneficiary designation form on file, not under the terms of the will. The wife unsuccessfully sought a court order directing the funds to be paid to her. She lost.
The takeaway from this advice is that although many people think drafting a will is simple and often undertake to do it by way of a “will kit” with legal zoom or some other legal stationery company, or ask an attorney to do a “simple will”, they may lose out big when their estate goes to someone other than their intended loved one.
The use of a properly drafted New Jersey will is a very good estate planning tool, but the beneficiary designations for your assets must reinforce, not conflict with, your estate planning objectives.
Not sure if your will, trust, or beneficiary designations are correct? If you have any questions concerning this subject, contact Fredrick P. Niemann, Esq. at (732) 863-9900, or fniemann@hnlawfirm.com. He is happy to answer your inquiries.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Last Will Attorney