Keeping up with your inheritance plan

“Old Beneficiary Form Gave His Ex $1 Million” Wall Street Journal 6/12/2024

Numerous inheritance methods trump what you say in your personal Will or Trust. When these methods are not carefully coordinated with your overall inheritance plan, they can financially reduce or eliminate what you plan to leave to your intended heirs. Here are four of the most common.

Outdated Beneficiary Forms

In the above story, the deceased had dated a woman when he was in his twenties. He designated her as the beneficiary of his 401 (k). They broke up after one year. He never updated the beneficiary form. When he died nearly forty years later, the ex-girlfriend received $1,000,000, shorting his family out of the money. The family sued for the money and lost.

Courts have consistently held that beneficiary proceeds must be paid precisely in writing before death in the manner stipulated by the account owner. This applies to retirement accounts, pensions, IRAs, life insurance, bank accounts (if there is a Pay-on-Death [POD] designation on file). It doesn’t matter what your Will or your Trust say. The beneficiary designation controls how the account is inherited.

Failure to Designate a Beneficiary or Lost Beneficiary Form

With the mergers of banks and other financial companies, and the potential for records to be misplaced, this is becoming a more significant concern. An averted disaster in my own practice illustrates this point. I had a client with a large IRA. One week after the account was opened, we faxed the company holding the IRA a beneficiary form, drafted by his attorney, that coordinated the IRA with the client’s overall estate plan. We kept the confirmation that showed the company had received the fax. When the owner died several years later, the company said they had never received the form, so they would pay the IRA to the owner’s probate estate, as stated in their generic account agreement. This would have caused the loss of over 40% of the IRA to the much higher income tax paid by a probate estate. Because we had a copy of the form and proof of receipt, we were able to present this to the company and avoid the loss. Without the paperwork, we would have been up the proverbial creek without a paddle.

Naming Minor Children as Beneficiaries

In almost every case regarding a married couple with young children I have reviewed in my career, spouses name each other as beneficiaries, and then their minor children as back-up beneficiaries if both spouses die. A child under 18 does not have legal signature, so they can’t be paid the claim. The insurance company will look to state law to see how to pay out the money. In Colorado, the check is issued to the State of Colorado for the child's benefit. A state district court will then set up a Minor’s Conservancy to manage the money and make it available to the child's guardian as needed. There are court costs, attorney fees, performance bond premiums, all of which are paid out of this money. The child gets control of the money when they turn 18. Most of the time, the money is squandered. If parents work with an attorney to create a Trust for their children and name it as a backup beneficiary, these problems can be avoided.

Improper Use of Joint Tenancy

I often see this with individuals as they age and require the assistance of adult children to manage their bank and other investment accounts. The parent adds one of their children as a joint tenant on the account. This creates two potential problems. First, should the child ever be sued and they are a joint tenant, half of the account could be lost to a judgement in the lawsuit, even though the original owner was not sued.

The second problem is that Joint Tenancy trumps Pay-on-Death (POD) designations. The uncle of one of my clients passed away. My client grew up in an upper-Midwest town of a few hundred people, many of whom were my client’s relatives. The uncle never married. He had one sizeable interest-bearing checking account at the local bank. He had named his twelve nieces and nephews to receive the CD in equal shares with a Pay-on-Death designation. However, he had named one of the twelve as joint tenant, with the idea that she could sign checks for him and help him manage his bills. When he died, this niece received the entire account, as the sole surviving joint tenant.  She kept it all for herself, even though that was not her uncle’s intent. Fortunately, because she and most of the other heirs still lived in this small town, she realized that her life would become very unpleasant, as she regularly encountered the heirs that she was shafting at the one local grocery store or church. She elected to do the morally right thing, honor her uncle’s wishes, and gift the money to her relatives. The solution to this problem would have been for the uncle to give his niece a Durable Financial Power of Attorney so she could sign checks on the account and help him manage his bills, but she would not own it with him. This would have achieved two things. First, the account would have remained solely in the name of the uncle, so the POD designation would have controlled the payment of proceeds at his death. Second, the niece would have had a legal obligation, as a fiduciary, to honor the POD designation.

Summary and Next Step

These are just a few of the dozens of ways inheritance plans can get derailed by a failure to carefully coordinate all your planning.

I promised Chuck Taylor, the man who trained me to understand these planning issues at the beginning of my career, that I would always work to prevent these problems in my clients’ planning. I have honored that promise.

I would be happy to review your current inheritance plan for a flat fee of $225, payable after I have completed the review. I review the ownership and beneficiary designations in all your retirement, life insurance, investment, and bank accounts. I then create a gap analysis of what must be done to coordinate your inheritance plan fully. You can then implement the needed changes or pay me an additional hourly fee to update the beneficiary provisions.

If I find no problems, you are already working with someone who understands these issues and cares enough to prevent them. In that case you owe me nothing. Further, with your permission I would like to contact whoever is responsible for the quality of your planning, congratulate them, and take them to lunch. I work for free 2% of the time.

I can be generous with my time because my business does not have marketing or advertising expenses. You are reading this because someone you know recommended me, or we met as I lived my life in our community.

If you would like to learn more, e-mail me at russ@strategicexit.com. I will respond with a link so you can schedule a meeting (phone, Zoom, or in person). I look forward to serving you and your family.