Coordination is Key: Poor Planning Sabotages Estate Plan

Suppose that your millionaire father tells you that you are the sole beneficiary under his will and then dies 2 weeks later.

The day after the funeral you contact your father’s sixth wife, that woman-who-is-not-your-mother, and she tells you that you are going to get zero, nada, nothing out of his estate because there are no probate assets.  You later find out she received everything outside of probate.

This scenario plays out more often than you think.  Let’s take a plunge into the murky waters of probate law to explain.

Probate is the legal process of administering a deceased person’s estate.  A probate action begins when someone files an application in a court with jurisdiction.  If the decedent left a will, then the court determines if it is valid.  If there was no will, then the court enters an order determining heirs.

After making those findings, the court decides if a probate administration is necessary and appoints a personal representative, either as executor or administrator, to handle the probate estate.

Now to the point:  the probate estate does not include any of the decedent’s assets that pass to a third party by contract or by other agreement.  Turns out that could be just about every type of asset a person could own.

Here are just a few examples of non-probate assets:

  • Joint accounts with right of survivorship, employee benefits with beneficiary designations
  • Insurance policies on the life of the decedent payable to an individual or charity
  • Retirement funds with a designated beneficiary
  • Trust interests
  • Investments with a beneficiary designation
  • Real property subject to a Transfer on Death Deed or a Ladybird Deed
  • Entity interests subject to a buy-sell agreement or operating agreement with restricted transfers
  • Vehicles with a beneficiary designation

All of these assets stay out of the probate estate because the decedent contractually arranged for them to do so.  Upon the decedent’s death, the contract stipulates what happens to the asset.  The beneficiary deals directly with the company holding the contract to obtain the distribution.  For example, if the asset is a life insurance policy, the beneficiary receives payment directly from the life insurance company.  The estate’s personal representative is not involved in the transaction.

Other types of non-probate assets may have been created by statute.  For example, proceeds from a wrongful death action arising from the death of the decedent are payable to a statutory beneficiary, not the decedent’s probate estate.

Most people think that their estate plan is carried out through their will.  They consider their total assets and spend a lot of time carefully crafting the language for bequests and distributions.

Then, inadvertently, they sabotage their estate plan through ill-considered beneficiary designations, one asset at a time.

The result is that their estate plan is gradually eviscerated.  At the end of the day, there simply aren’t enough probate assets to properly effectuate the terms of the will.

And that is how you ended up with, to quote the charming sixth wife, nada.

Virginia Hammerle, Managing Attorney for Hammerle Finley Law Firm, has been recognized from 2012-2018 as a Super Lawyer, a Thompson Reuters Publication.  See hammerle.com for her blog and newsletter sign-up.  This column does not constitute legal advice.