By: AnnaMarie Mock, CFP®
Updating estate documents is crucial because it ensures that your wishes are accurately reflected and legally honored as your life circumstances change. Imagine the birth of a new child, a marriage, a divorce, or the windfall of significant assets. These events can dramatically alter your intentions regarding who should inherit your belongings and how it's managed.
Without regular updates, your estate plan might become outdated, leading to potential disputes among family members and loved ones. Furthermore, law changes can affect the effectiveness of your estate planning documents. Keeping these documents current safeguards your legacy and provides clear instructions to prevent confusion, reduce stress, and ensure a smoother process for those you leave behind. Regularly updating your estate documents is a proactive step reflecting your evolving life and priorities, offering peace of mind that your final wishes will be fulfilled.
Three principles can help you remember the importance of how assets pass at someone's death. It becomes straightforward if you remember:
C.O.W. - Contract, Operation of Law, and Will.
Contract: Designating beneficiaries in estate planning is akin to crafting a contract that ensures your assets are distributed according to your desires. Like a written agreement, beneficiary designations spell out who will receive specific assets, from life insurance policies to retirement accounts, bypassing the often-cumbersome probate process. This "contract" between you and your beneficiaries is binding and straightforward, providing clarity and peace of mind. By naming beneficiaries directly, you create a legally enforceable plan that guarantees the transfer of the asset in the exact manner you intended. It simplifies estate management, streamlines asset reallocation, and reflects your legacy for your final wishes. In summary, beneficiary designations are a simple way to bequeath assets at your passing.
However, issues can arise if the beneficiary designations are never reviewed, especially when life undergoes significant changes, like the birth of a child, divorce, or shift in family dynamics.
This isn't a new issue and has been tested many times in the courts. Here are a couple of examples.
Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (2009): In this case, William Kennedy had designated his ex-wife as the beneficiary of his DuPont pension plan. After their divorce, he did not change the beneficiary designation, although the divorce decree waived her rights to the plan benefits. Upon his death, the Supreme Court ruled that the plan assets were to be distributed to the ex-wife because she was still the named beneficiary on the plan, despite the divorce agreement.
Egelhoff v. Egelhoff (2001): David Egelhoff designated his wife as the beneficiary of his life insurance and pension plan. After their divorce, he did not update his beneficiary designations. When he passed away, his children from a previous marriage argued that the benefits should go to them, especially since Washington state law revoked spousal beneficiary designations upon divorce. However, the Supreme Court decided that federal ERISA law preempted the state law, and the ex-wife was entitled to the benefits since she was still listed as the beneficiary.
Main takeaway: Beneficiary designations are usually legally binding and trump other laws and legislation. It's imperative to review your beneficiary designations and make changes as needed regularly.
Operation of Law: The operation of law automatically transfers or assigns property without any action required by the individuals involved. It is centered around the titling of assets – accounts and property. It's like an invisible hand ensuring that legal processes proceed smoothly and fairly. For example, joint accounts with rights of survivorship automatically pass to the surviving co-owner, while accounts designated with "Payable on Death" (P.O.D.) or "Transfer on Death" (T.O.D.) beneficiaries are transferred directly to those named without court intervention. Operation of law will distribute the assets based on the titling of the asset rather than through the will.
An exception to this is tenancy in common. It is a form of property ownership where two or more individuals hold shares in a property. Each owns a specific percentage, which can be unequal, and they can freely sell or bequeath their share. Upon death, their share passes to their heirs, not the other co-owners.
Similar to beneficiary designations, titling of assets can also cause lengthy legal disputes.
Keck v. Keck (1996): Herman Keck had several bank accounts titled jointly with his brother, Albert, in this Missouri case. After Herman's death, Albert claimed the accounts as the surviving joint owner. However, Herman's estate challenged this, arguing that Herman had intended the funds to be distributed according to his will, which divided his assets among multiple heirs. The court ultimately ruled in favor of Albert due to the joint designation.
In re Estate of Kurrelmeyer (2006): Evelyn Kurrelmeyer had several accounts jointly titled with her husband, Walter. After Evelyn's death, Walter failed to update the account titles to reflect his sole ownership. When Walter later passed away, the accounts were treated as part of Evelyn's estate, leading to a legal battle among their heirs about adequately distributing the assets.
Main takeaway: The court decisions and potential legal actions by disgruntled heirs underscore the legal strength of account titles and the need to update them to match the owner's current intentions.
Will: All assets that do not pass based on beneficiary designations and operation of law pass through a last will and testament. Assets are distributed based on instructions in a will through a process called probate, where the will is validated, and the deceased person's wishes are carried out under the supervision of a court.
Think of a will as a detailed map guiding the distribution of your belongings according to your specified instructions. When you pass away, an executor named in the will takes charge, ensuring that debts are settled and assets are transferred to the named beneficiaries within the document. This process includes everything from liquidating property to transferring bank accounts and personal items.
By clearly outlining your intentions in a will, you provide a blueprint that helps avoid confusion, reduces the potential for disputes, and ensures that your legacy is honored just as you envisioned, giving peace of mind to you and your loved ones.
Dying without a will is problematic because it leaves asset distribution to state laws, potentially disregarding your intentions. It can lead to family disputes, prolonged legal processes, and unintended beneficiaries.
Prince (2016): The legendary musician Prince died without a will, leaving an estate valued at an estimated $200 million. With no designated heirs, his estate was subject to a lengthy legal battle among his siblings and half-siblings. The process of determining heirs and managing the estate has been complicated and ongoing, highlighting the complexities of dying intestate (without a will).
Aretha Franklin (2018): The Queen of Soul, Aretha Franklin, passed away without a will, resulting in disputes among her four sons and relatives over her estimated $80 million estate. The situation has been further complicated by the discovery of multiple handwritten documents in her home, which some claim to be wills, leading to ongoing legal proceedings to determine their validity.
Main takeaway: Without clear instructions, your loved ones may face confusion and conflict during a difficult time. It's necessary to have a will and review it over time to ensure nothing is outdated.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.