Don’t Screw This Up

My client called me in a panic. After his spouse, Bobbi, died, my client checked with Bobbi’s employer. Bobbi had a life insurance policy through her work. The human resources director assured my client that the policy beneficiary was the spouse. Yet, my client was the second spouse. What if the beneficiary named in the insurance policy was still spouse number one?  If so, then my client would not receive the death benefit.

Assets with a beneficiary designation, like life insurance, pass by operation of law. They are not subject to the terms of a will. They do not go through the probate process in Court. To collect the death benefit, the beneficiary needs to present documents to the insurance company. They will ask for an original death certificate and the completion of some standard forms.

Sometimes the insurance company will ask for “letters of administration” or “letters testamentary.” “Letters” are documents issued by a court when a probate matter is opened. The request for “letters” is typically in error. Assets with a beneficiary designation do not pass through probate. Certification of a probate process and the appointment of a personal representative or executor are generally irrelevant.  Only if the beneficiary of the life insurance is the probate estate would the insurance company require proof of the appointment of a personal representative.

Other assets with beneficiary designations pass directly to the beneficiary and without probate. These include retirement accounts such as IRAs, 401k, and 403b.

Beneficiary designations do get messed up. There are several simple lessons that clients often fail to follow in estate planning for assets with beneficiary designations.

Lesson number one is to always double-check beneficiary designation forms. You can and should name a beneficiary for every IRA, 401 K, insurance policy, annuity, or similar investment, Keep a copy. If you don’t have a copy, request one from the insurer or corporate offices.  Even better, download a new beneficiary designation form and submit that. Only the latest form filed is the one that matters.

Lesson number two is to be very specific in making your beneficiary designation. Use the beneficiary’s full name and indicate their relationship to you. Do the same for any alternate or successor beneficiaries. If there is more than one beneficiary named, get the percentages right. You can also rely on legal terms like, per stirpes. Check off per stirpes to guarantee that any interest among beneficiaries will be shared equally by them. If a beneficiary predeceases the policy owner, the per stirpes designation guarantees that their share will pass in equal shares to their descendants.

Lesson number three. Don’t rely on what anybody says. Rely only on documents. Otherwise, you may suffer unnecessary anxiety.

Several hours later, the human resources director called my client.  His spouse changed the beneficiary designation to state the name of the second spouse. My client was relieved to learn that his spouse had not screwed up their life insurance.

Evan J. Krame