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.

What is the Difference between an Heir and a Beneficiary?

In everyday life, you will often hear people speak about their hope for an inheritance from a family member or relative.  However, this commonplace use of the term “inheritance” often masks a misunderstanding of the law and can lead to unintended consequences when misplaced assumptions are not addressed.  Today we are going to examine exactly what the term “inheritance” means from a legal standpoint, and how having a Will takes uncertainty out of the equation.

What defines an “heir”?  Strictly speaking, one is not an “heir” of a living person.  That is because the exact identity of an “heir” is determined at the time of the decedent’s death.  The determination is made by the laws of the jurisdiction, and not by the decedent.  An “heir,” then, is a legal creation and its terms are defined by a State.  One becomes an heir by virtue of satisfying the definition in a statute.  In New York, that statute is EPTL § 4-1.1. That is because New York  has an interest in the smooth transfer of property from one generation to the next.  As such, an “heir” is the statutory recipient of property from a decedent who dies without a Will (intestate).  The State is also the final “heir” in most statutory schemes.  If there are no statutory heir, then the property will go to the State (escheat).  In New York, a person who inherits property under intestate succession is called a distributee.

New York also has a “laughing heir” statute (EPTL §4-1.1(6)).  A “laughing heir” is someone entitled to inherit by law who is so remotely connected to the deceased that he or she would not feel any sorrow at hearing of the death.  To prevent this occurrence, New York cuts off heirs at the grandchildren of the deceased:  “For the purposes of this subparagraph, issue of grandparents shall not include issue more remote than grandchildren of such grandparents.”  No one more remote, such as a great-grandchild, may inherit.  After that, the property of the deceased escheats to the State.

When a person dies without a Will, New York uses as its default an intestate distribution system called per capita (“each head”) at each generation.  In this system, each person is weighed equally.  By virtue of their presence on the family tree, no one can be disinherited.  The first thing we have to do is determine the number of surviving distributees. To illustrate: Beth is a single person who dies without a Will.  She had two sons named Luke and Dick, and a daughter named Nancy.  Luke had two children, Bill and Jane, and Nancy had one child named Jim, and Dick had two children named Sandy and Sam.

At the time of Beth’s death, Luke had already predeceased her.  Had Luke been alive, he, Nancy and Dick would have each received 1/3 of the estate.  Because Luke has already died, Nancy and Dick each receive their 1/3 share, and Luke’s children divided what would have been their father’s share equally between them.  So Nancy receives 1/3, Dick receives 1/3 , and Bill and Jane each receive 1/6.   

Depending upon your family situation, the New York default system of distribution may not suit your needs.  In that case, you may want to draft a Will stipulating that you want your estate distributed per stirpes (“by each branch”) to give you more control over the outcome.  In New York, a person who receives under a Will is called a beneficiary.  Let’s say that you want your great-grandchild to receive something from your estate.  Drafting a Will eliminates the “laughing heir” statute and allows you to leave something to your great-grandchildren.  A Will also allows you to distribute your estate to a class of beneficiaries, such as “to all my children” or “to all of my grandchildren” to cover any issue born or adopted after the execution the Will (pretermitted child).  The class closes at the time of the death of the testator.

Finally, instead of having your estate possibly escheat to the State, you can name a person unrelated to you or a charity as a beneficiary of your residuary estate.  Your property can then be used in a way that is consistent with your life and beliefs.  You should seek the advice on an attorney in drafting a Will so that your wishes are reflected in the resulting document.

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.