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.

If you would like to discuss your own personal situation with me, you can get a free 30-minute consultation simply by filling out this contact form.   I will get back to you promptly.

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Beneficiaries Not Controlled by a Will: Understanding the Fine Print

In previous blog posts, I have discussed default rules that impact your estate.  For instance, if you do not have a Will, then the State statute governing the distribution of your estate will go into operation.  In New York, that statute is EPTL § 4-1.1.   Your wishes expressed in a valid Will overcome the default rules expressed in the statute, however.  Today we are going to discuss assets that are not impacted by either a valid Will or a State statutory schema, and how your selection of a beneficiary distribution scheme will impact who can receive these assets.

If you have an IRA, 401(k), 403(b), an employer-sponsored retirement plan, a life insurance policy, or an annuity contract, then each of these allows for a beneficiary designation.  These types of accounts are called “payable on death” (POD) or “transfer on death” (TOD) accounts because they pass directly to your named beneficiaries outside of probate on the event of your death.  You may change your beneficiary designations on a POD account at any time, and it is a good habit to review your beneficiary designations on these accounts at least once a year to account for any changes in your life or your family’s life.

POD accounts are not controlled by the beneficiary stipulations in your Will, or by the distribution scheme you have selected in your Will, or even by the default provisions in a State statute.  They are contracts that you sign with a provider.  As such, you are bound by the provisions of the contract and the distribution system found in that contract. We discussed in a prior post the differences between the per capita at each generation distribution system, which is New York’s default system if you die without a Will, or a per stirpes distribution system, which you can elect in a valid Will.  Each contract that you have signed has a provision that details which distribution system governs that contract.  The trick is to understand the distribution provision in your contract(s), and to adjust your estate planning to account for this variable.

Why does this matter?  Let’s look at an example.  Let’s imagine that you are a single parent with three children.  Your eldest child is also the parent of two children.  You have an IRA contract, a POD with beneficiary designations. 

Let say that the POD contract’s default beneficiary distribution schema is a per capita distribution.  Now let’s assume that your eldest child predeceased you.  What result with a per capita distribution?

With a per capita distribution, so long as you have living children, none of your assets will be distributed to your grandchildren.  If Child 2 also predeceased you, Child 3 will receive 100% of the assets.

Now suppose that your POD contract allows you to select a per stirpes distribution.  What result?

With a per stirpes distribution, the 1/3 share that Child 1 would have received is distributed to that child’s lineal descendants.  Your grandchildren may now receive a portion of your assets.

Reading and understanding the fine print in all of your POD contracts is the first step towards providing for your family’s long-term needs.  The next step is to reconcile any variations between and among your various POD contracts.  To offset these variations in beneficiary distribution schemes, you may wish to consult your attorney to discuss the advantages or disadvantages of naming your estate as the beneficiary on your POD accounts, assuming that you have a valid Will, or a trust that would receive the proceeds of your POD accounts and then distribute these proceeds according to the language of the trust.

In any case, this topic illustrates the need to meet with your attorney on a yearly basis to review your estate plan, including changes in your family, your Will, your POD accounts, and any trust instruments that you may have drafted.  These are complex matters that require professional knowledge and attention to detail.  This is a yearly appointment that you don’t want to miss because it will ensure the continued welfare and well-being of your loved ones.

If you would like to discuss your own personal situation with me, you can get a free 30-minute consultation simply by filling out this contact form.   I will get back to you promptly.

I invite you to join my list of subscribers to this blog by clicking on “Sign me up!”  under Email Subscription on the left-hand side of the page so that you can receive a notification when the next installment has been published.  Thank you.