When something this Easy creates Complexity
By Attorney Jim Plitz
Naming your beneficiaries is one of the easiest parts of planning your estate. The person (or people) named simply fill out the paperwork at the time of your death, and the company holding the money “writes them a check.” Now that may be a slight oversimplification, but compared to other estate planning topics, it is straightforward.
The most common accounts you will designate beneficiaries are your IRA/401k and your life insurance policies. But there are banks and other financial institutions that allow beneficiary-type designations on other accounts as well – these are “PODs”. PODs are “Payable on Death” accounts.
However, like with most aspects of estate planning, reviewing and confirming your beneficiary selection is critical. You want to have the assurance that the people you selected to receive that gift in a straightforward, easy process will be able to do so. But that is not always the case.
Just last week, The Court of Appeals of Indiana issued a memorandum decision in Ball v. Cook, et. al. (Memorandum Decision 23A-PL-1465, April 24, 2024). You can read the entire case here: https://law.justia.com/cases/indiana/court-of-appeals/2024/23a-pl-01465.html.
Though the outcome of the case would be what would be expected, there are still a few lessons that we can all learn from it – not the least is to check and double check your beneficiary designations.
In the case, Dale Hendrickson died with a last will in place. He also had a one-million-dollar life insurance policy. When the policy was issued, he named his long-time assistant, Sheila Ball as the beneficiary. Two years prior to his death, Mr. Hendrickson asked Ms. Ball to obtain change of beneficiary forms, so that he can change the beneficiary from her to his estate. She did that, and in fact followed up with the agent, prompting her to send in the form a second time. But at the time of Mr. Hendrickson’s death, the insurance company still had Ms. Ball listed as the beneficiary. Thus, the court case, and subsequent appeal were needed to sort out this mess – who should receive this one-million-dollar pay out?
To further complicate matters, Mr. Hendrickson’s “Why” was agreed to as fact, but the outcome of the case negated that intent.
I will digress for a bit, as the “why” you do things is tremendously important, especially when it comes to Wills, Trusts, and general estate planning. When I read that Mr. Hendrickson’s “why”, I thought that was fabulous, but it would seem he could have achieved his intent in a clearly manner.
This leads to Lesson One – work with advisers who collaborate.Mr. Hendrickson wanted to solve two issues with his life insurance policy: 1) Pay off some debt, and 2) provide retirement benefit to his long-time employee, Ms. Ball. These are very good “Whys”. But to achieve this, when the policy was issued, he, presumably with the advice of his insurance agent, he simply named Ms. Ball as the full beneficiary. This would achieve goal number two, for sure. However, there would be no legal requirement for Ms. Ball to use those funds for his debts. Life insurance passes outside the probate estate, and the debts of the deceased are paid through the probate estate.
When Mr. Hendrickson attempted to change the beneficiary to the estate, his first goal would now be achieved, but it would negate the retirement for Ms. Ball.
A better outcome would have been achieved if his insurance agent and estate planning attorney collaborated to provide the best collaborative advice and achieve both goals in the most efficient way possible. Using the provisions in the Last Will along with the beneficiary designations would have achieved both goals and eliminated the expense and time of the court case.
Lesson Two – Beneficiary Designation supersedes the Last Will. Not specifically mentioned in the case, but a lesson none-the-less, is that changing your Will does not affect any beneficiary designation, as well as visa versa. As mentioned earlier, when Mr. Hendrickson had Ms. Ball as the beneficiary, she would have received all one-million-dollars at his death, regardless that the Will stated to use the funds to pay his debts. Where I see this more is when your life insurance policy names one of your kids as the beneficiary (because she is the trusted one), while your Last Will names all three of your kids. When the time comes, the insurance company will pay to just the one child, even though your Will says you are treating all three of your kids equally.
LessonThree –Ambiguity Costs Money. Mr. Hendrickson’s estate incurred more legal fees than a typical probate, all because the ‘easy part’ of the estate was ambiguous. Since the insurance company thought they needed to pay the proceeds to Ms. Ball, but the evidence supported that the estate should be the recipient, the personal representative (aka executor) of the Hendrickson Estate filed an interpleader action (simply a court case to determine the rightful recipient of the proceeds). When the Estate won, Ms. Ball appealed, incurring more legal fees. At both levels, the Estate requested that Ms. Ball pay the Estate’s legal fees, and each time the Court rejected the request. This means that even though the
Estate “won”, the costs to litigate, and then defend at the appeal cost the Estate thousands of dollars (exact legal fees are not public record). These legal fees, if the plan was not ambiguous, would simply have been in the Estate to be passed to who Mr. Hendrickson had desired.
Finally, Lesson Four – Check and Confirm Beneficiary Designations. Coming full circle is that beneficiary designations should be reviewed each time your financial or estate plan is
reviewed. By making sure, on a regular basis, that the people listed are who
you want, it
eliminates many of the issues we saw in the Ball v. Cook case. This is especially critical when there is a change being made. Receiving, and then keeping, the confirmation of the requested change will also mitigate issues in the future. Working with your financial adviser (“FA”) helps make sure this step happens correctly. Your FA will help make sure the designations are done properly and provide or remind you to save the confirmation notice of the change.
Naming your beneficiaries should be the easiest part of the estate planning and administration process. But, as we just learned, there are areas that can create chaos. Though reading cases about these troubles is not desired, I can take solace that it did not happen to you. And by working with advisers who listen and collaborate to provide you with the best support and advice, you will be able to rest assured that there won’t be chaos in your estate.
Planning Tip: Now that you finished reading this article, take this moment to check your beneficiary designations. There is no time like the present
Jim Plitz is an estate planning and business succession planning attorney with the law firm Waters, Tyler, Hofmann & Scott, LLC. Jim is licensed in Indiana, Kentucky, New Mexico, and Arizona.
Jim can be reached at EstateLaw@WTHSLaw.com or 812-949-1114
Attorney, James P. Plitz (but you can call him Jim), was born and raised in Central New Jersey. Jim earned a B.S. in Accounting from the College of New Jersey, and then his MBA, with a concentration in Finance, from Lehigh University. These degrees helped him through his early career in operations and project management with Ladenburg Thalmann, Prudential Insurance, and Travelers Insurance.
Jim felt those roles were unfulfilling. He needed to find a career path in which he was able to help people. So, he went to law school and started down the path to becoming an estate planning attorney. Jim graduated magna cum laude and then earned the second highest score on the Arizona bar exam. Jim is also licensed to practice in Indiana, Kentucky, and New Mexico.
Jim started his career at the estate planning firm of Morris Hall. There he learned extensive estate planning techniques and practices through his 10+ year tenure – helping over 1,000 families successfully plan and administer their estates. Through that experience, Jim found true satisfaction – proper estate planning helps families!
Jim moved to Southern Indiana and quickly found that it is home – where he can be a part of the community and help as many families as possible. Joining Waters, Tyler, Hofmann & Scott provides him a greater opportunity to reach and work with families throughout New Albany, southern Indiana, and across the river in Kentucky.
Jim is married to Heather. They have three sons, Scott, Aiden, and Remy, and four dogs, Lily, Sasha, Trust, & Will. They enjoy exercising, taking drives in their Jeep, and entertaining the neighborhood with their Halloween display.
Jim feels strongly about giving back to the community. He is on the Board of Floyd County Animal Rescue League, Develop New Albany, and the Rotary Club of New Albany. He is also the president of the Southern Indian Estate Planning Council.