I can’t believe my will and trust didn’t work
October 22, 2012
by Brian Wolf

Oftentimes the best-laid plans for people just don’t work out. Sometimes when this happens I think about the phrase . . . “A little bit of knowledge can be dangerous.” This was first quoted by Alexander Pope in an essay from 1709. The meaning is something along the lines of, a small amount of knowledge can mislead people into thinking that they are more expert than they really are.

Most of the time when our office reviews financial affairs for people, we find disconnects. A disconnect is something that by itself might be fine, but when you connect it with other things, it become not so fine. A classic example of this would be an attorney setting up a trust for someone and then the financial planner doesn’t fund it properly because they aren’t working with that attorney. In other words, they don’t have a coordinated advisory team to make sure the right hand and the left hand are working together.

Here’s another example. A guy (we’ll call him John) is married to a girl (we’ll call her Mary) for many years. Unfortunately, they get divorced. In the divorce agreement, Mary gives up all rights to John’s 401k plan and life insurance. John changes his will and trust to name his children as beneficiaries of all of his assets, but he never changes the beneficiary of either his 401k or his life insurance. Mary is still listed on those documents.

Then John dies. Who gets the money from his 401k and his life insurance? Do his children get the money because they are named as his beneficiaries of his will and trust? Or does Mary get the money because she is named as beneficiary of his life insurance and his 401k? (Remember, she signed off all rights to this money in the divorce agreement.)

The answer is Mary; Mary gets the money. Why?

Because beneficiary agreements over-rule wills and trusts. The Supreme Court has ruled in multiple cases, that beneficiary forms override all others, with a few exceptions.

Now, let’s change the facts a bit. Let’s assume that John also changed the beneficiary forms on his life insurance and 401k and named his children as beneficiaries. Who gets the money now?

In this case, the children get the money as expected.

One more change to the facts. Let’s imagine John gets re-married to Joan. His children are still listed as the beneficiaries on both his life insurance and his 401k. He is married to Joan for six months and then dies. Who gets the money?

Answer: the children get the life insurance and Joan likely gets his 401k, even though the children are listed as beneficiaries.

How can this be?

Because 401k plans are “ERISA” plans. ERISA plans require the spouse to be the beneficiary, unless they sign a waiver giving up their rights to the money. Odds are very high that John never had his new wife sign that form. Since Joan is John’s wife at his death, ERISA says she gets the money and not the children.

How could he have gotten around that one? John could have moved his money into an IRA, which is a non-ERISA plan, and then the money would have gone to the kids, as he wished.

Beneficiary rules are complex, and as a result, many times money goes places that the original owner didn’t intend.

I’ll conclude with a few questions you should ask yourself.

1. Are all my financial affairs in proper order?

2. Did all my advisors (insurance agent, financial planner, attorney, CPA etc.) work together in setting up my plan?

3. Is it time to have someone else review it for potential disconnects?

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