When Estate Planning Goes Awry: Ambiguous Beneficiary Designations on Testamentary Substitutes

Beneficiary designations appear most often in insurance contracts, retirement plans, and annuity contracts.  These contracts are known as  testamentary substitutes because they pass outside of the probate estate. The insured or annuitant is asked to designate both the primary beneficiary(ies) and the contingent beneficiaries.  We will examine a case where an issue of construction with respect to the primary beneficiaries required Surrogate Court intervention.

On March 10, 1989, Archibald Foley executed a Will in which he divided the residuary estate as follows:  “…shall be divided into six (6) equal shares․ one each of those shares to each of my brothers and/or sisters who shall survive me and one share to be divided equally between my niece, Carmel Foley, and my nephew, Lawrence Foley, or their survivor.   If neither of them survive me or if any of my brothers and sisters shall fail to survive me, then I direct such share as would have gone to them to be divided equally amongst those brothers and sisters who do survive me.”

On March 13, 1989, Dr. Foley changed the beneficiary designation on four 20-year guaranteed retirement annuities with a combined date-of-death value of $275,872.75 to read:   “to be divided equally, share & share alike among my living brothers and sisters, and one share to be divided equally between my niece (Carmel Foley) & nephew Lawrence Foley.’  Then on March 20, 1989, Foley designated the primary beneficiary under his defined contribution retirement plan with a date-of-death value of $709,380.04 to read:  “to be divided in equal shares among my living brothers and sisters-and an equal share to be divided between my niece Carmel Foley and my nephew Lawrence Foley.” He did not designate contingent beneficiaries under either the retirement annuities or the defined contribution retirement plan.  Foley’s Will was admitted to probate on April 7, 1998 (In re Estate of Foley, 181 Misc. 2d 258, 693 N.Y.S.2d 843, 1999 N.Y. Misc. LEXIS 241 (N.Y. Sur. Ct. May 24, 1999)) [http://caselaw.findlaw.com/ny-surrogates-court/1444422.html]

By the time Archibald Foley died, all of the primary beneficiaries under the annuities and the retirement plan had died except for his sister Edna and his niece Carmel.  The executor of Foley’s Will sought a judicial ruling as to how to distribute the proceeds, particularly the 1/4 share to his predeceased nephew Lawrence.

As it turned out, this was an issue of first impression for the New York County Surrogate’s Court.  ” No authority has been discovered which addresses whether a predeceased beneficiary’s share under a retirement plan or annuity contracts passes to the estate of decedent or to the surviving beneficiaries.” Basing its analysis on prior analogous cases (The New York City Fire Department Life insurance Fund and totten trust accounts), the court reasoned that where beneficiaries were designated as individuals (Carmel and Lawrence) and not as a class (my living brothers and sisters), then they took as tenants in common and not joint tenants with right of survivorship. “Here, Mr. Foley did not expressly declare a joint tenancy in the beneficiary designation of either the retirement plan or the annuities.   Nor does the Court find the evidence that Mr. Foley intended for Lawrence Foley’s proceeds to pass to the surviving beneficiary, Carmel Foley, to be sufficiently clear.  Thus, the Court is required to hold that a tenancy in common has been created.  [See EPTL 6-2.2(a) ]. Accordingly, Lawrence Foley’s share of the proceeds from the retirement plan and the annuities are to be distributed to the estate of Mr. Foley.”  The Will then governed the distribution of Lawrence’s share, being the only document with express instructions as to predeceased relatives.  Thus a non-probate asset became a testamentary asset subject to probate.

The court was sensitive to the fact that this holding may have disrupted the intent of Mr. Foley’s estate plan, but in the absence of express declarations and named contingent beneficiaries, and the ambiguity of the language used to create the primary beneficiary designations, this was the only possible result.  Yet the court was aware that this was an anomalous result: “In the absence of legislation reversing the general common law presumption in the context of retirement plans, annuity contracts and other testamentary substitutes, modern thinking as to presumed intent cannot be extended to these assets.   This anomaly merits consideration and therefore is referred to the EPTL-SCPA Advisory Committee for such action as it deems appropriate.”

The lesson here is clear:  the drafting of beneficiary designations on testamentary substitutes needs to be done with great care.  Moreover, you should safeguard even your testamentary substitutes by having a Will with clear bequest, beneficiary, and residuary estate language.

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