WHAT CONTROLS: THE WILL or THE BOX?To answer the above question, I must first tell you what I mean by the box. When I say the box, I am referring to the beneficiary designation box found in many financial instruments. For example, life insurance policies, annuity contracts, IRAs (individual retirement accounts), and other retirement plans allow the owner to designate (usually in a box or line on the form agreement) who is to be the beneficiary or recipient of the proceeds upon the owners death. In addition to the above categories of beneficiary designations, many bank accounts, investment accounts, stock certificates and CDs (certificates of deposit), allow for a POD (Pay On Death) beneficiary. As with the insurance, annuity and retirement account beneficiary designations, the designation of the POD beneficiary is usually done by inserting one or more names in a box or line on an account agreement.
Now that I have explained the question, what is the correct answer? If someone has designated a former spouse as the beneficiary on a life insurance policy or retirement plan, can a new will designating a new spouse as the beneficiary of all the individuals assets supersede the earlier designation? In other words, does the designation in the will supersede the designation in the box? The answer is no. In almost all cases, the will does not supersede the contractual designation.
Many people mistakenly believe that the will controls the distribution of all their assets and supersedes any earlier beneficiary designations. It is understandable that many people have this mistaken belief. First, a will has many formalities associated with it. A will generally has to have the signatures of at least two unrelated witnesses. An attorney normally prepares the will. It is usually notarized. Often much time and thought accompanies the signing of the will, as well as other formalities. On the other hand, the beneficiary designation is usually very simple. Usually, it involves nothing more than printing or typing a name in a box.
There is an answer as to why the designation in the beneficiary box governs the disposition of the account or policy proceeds rather than the will. The previously described financial instruments (life insurance, annuity, POD accounts, retirement accounts, etc.) are contracts. Pursuant to the terms of these contracts, the owner can specify who is to receive the assets at the time of his or her death. Only a specific change of the contract can change who is to receive the proceeds. The will cannot change the contract. There have been many spouses and children very surprised to learn that although a loved one's will was reviewed and updated, the older beneficiary designations control.
It is essential that beneficiary designations be reviewed and coordinated when doing estate planning. There are many issues related to beneficiary designations.
A problem with beneficiary designations is that they are limited. If the beneficiary designation is just a line or box, there is no opportunity to describe how the proceeds should be used or who should receive the proceeds if one of the named beneficiaries predeceases the owner. It should be noted that if the beneficiary designated in the financial instrument has predeceased the owner and there is no surviving contingent beneficiary or if the named beneficiary is designated as the estate, the terms of the will or state statute governing the distribution of assets when there is no will will govern the distribution of the proceeds.
Another issue related to beneficiary designations pertains to minor children. Minor children are not legally capable of receiving proceeds as beneficiaries. Therefore, many people name someone else with the understanding that the proceeds are really for the children. This is probably not the best alternative. When minor children are involved, the use of a trust (either within a will or a revocable living trust) is a better solution. The person or institution named as the trustee of the trust receives the proceeds for the benefit of the children subject to the terms of the trust. If the trust is designated as the beneficiary, the trust document can specify in great detail how the proceeds are to be used.
Coordinating beneficiary designations is also important for tax purposes. In certain situations, both income and estate taxes can be saved if certain individuals or trusts are named as beneficiaries.
In conclusion, proper estate planning involves a thorough review of all assets and beneficiary designations. It is very important that beneficiary designations be coordinated with an individual's estate plan.
Jeffery J. McKenna
Attorney licensed and servicing
clients in Utah, Nevada and ArizonaCopyright © 1999-2010 Barney McKenna & Olmstead, P.C.
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