Is Your Will Doing What It’s Supposed To Do?
A $500,000 Mistake
Rebecca called after her husband, Peter had died. She had questions about his will and his 401k. Rebecca was Peter’s second wife and he had two daughters from his first marriage. Between his first and second marriages, Peter had designated his daughters as the beneficiaries of his life insurance and 401k and had changed his will to leave everything to them as well.
After they married, Peter changed his will to leave some of his assets, including his $500,000 401k, to Rebecca. The home he and Rebecca lived in, but which he owned, he left to his daughters, but provided Rebecca with the legal right to live there. The life insurance he didn’t change. His daughters remained the beneficiaries. So just what was the problem?
Rebecca was told by the 401k custodian that Peter never changed the beneficiary designation to her. As such, she was told, they must pay Peter’s daughters, not Rebecca, despite what the will says. Understandably, Rebecca didn’t like that answer. This unfortunate result could have been prevented with #3 in our unique 19 Point Trust, Estate & Asset Protection Review.
Wills On Their Own Aren’t Enough
The reason Rebecca couldn’t get the money Peter had meant for her was because wills do not automatically control how all property passes. The Will only applies to what are called probate assets, those that pass by way of the will. Non-probate assets, such as retirement accounts and other assets which have beneficiaries designated upon death, are not governed by the will. That was why Rebecca wasn’t able to get the 401k that Peter had intended for her. For more information on this subject take a look at the Special Bonus Chapter The Biggest Long Term Planning Mistakes in our new book, The 10 Biggest Estate and Asset Protection Planning Mistakes People Make And How to Avoid Them! Available soon on Amazon.com soon
She asked me if I thought a lawsuit could force the 401k custodian to pay the account to her because the will clearly states Peter’s intent to leave it to her. She even showed me the paragraph in Peter’s will which makes reference to the 401k and his desire to leave it to her.
All Too Common A Problem
I told her about a case I had read about several years before which had many similarities to hers. Just like in Rebecca’s case, a husband had died leaving his 401k to his wife, Sarah, via his will. Also just like Rebecca, Sarah couldn’t collect it and contacted an attorney. Sarah’s attorney filed a lawsuit to try to get a court to order the IRA custodian to pay a surviving spouse even though the beneficiary designation on file named someone else. Not surprisingly he lost the case because the beneficiary designation trumps the will. Retirement accounts are referred to as contract property. There is a contract with the custodian that when you pass away they will pay the beneficiary whom you have designated and if there is none then the company has a predetermined set of beneficiaries (usually the “estate”) that they will pay.
So Now What?
In that other case, the only option Sarah had was to file a malpractice claim against the attorney who drafted the will because he should have known that leaving contract property by way of a will is impossible. Unfortunately, that was the only option Rebecca had at this point as well. I couldn’t say whether she had a good malpractice claim. She would need to speak to an attorney who does that kind of work. But as far as getting it from the 401k account, I told her she’d lose out on the $500,000, a very costly mistake indeed.
This is why we always tell our clients that a will by itself is never enough on its own. Less experienced attorneys will often make the mistake of listening to this common misconception, and it is their clients who wind up paying the price.
At the Estate Planning & Asset Protection Law Center, we provide a unique education and counseling process which includes our unique 19 Point Trust, Estate and Asset Protection Review to help people and their families learn how to protect their home, spouse, life-savings, and legacy for their loved ones, click here for more information. We provide clients with a unique approach so they understand where opportunities exist to eliminate problems now as they implement plans for a protected future.
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