When you die, any accounts for which you have designated a beneficiary will be distributed to the account beneficiaries outside the probate process. This includes retirement accounts, savings accounts, investment accounts and other types of accounts which a beneficiary can be designated to receive the account when you die. That’s why this category of asset is referred to as “nonprobate” assets. That’s also why the estate planning process does not end with the meeting with your attorney to sign your estate planning documents. A very important – though frequently overlooked – final step is to update your account beneficiary designations to coordinate with your estate plan. A recent opinion issued by Division II of the Washington Court of Appeals emphasizes why paying attention to account beneficiary designations matters.
In the case, In re Estate of Collister, the Court of Appeals addressed the distribution of the proceeds from a life insurance policy when the beneficiary designated on the policy differed from the beneficiaries the decedent designated for the policy in her Will. The court ruled that the account’s beneficiary designation prevailed.
First, a little background: It is possible to effectively transfer a nonprobate asset to a beneficiary not designated as a beneficiary on the account through a Will provision drafted to be consistent with the terms of Washington’s Testamentary Disposition of Nonprobate Assets Act (TDNAA). Estate planners like to refer to this statute as the “Superwill” statute.
A Superwill sounds cool, but its super-powers are somewhat limited in scope. The statute only applies to certain nonprobate assets. In Collister, the court concluded that because the statutory definition of nonprobate asset specifically excluded payable-on-death life insurance policies, the Superwill statute did not apply. Thus, the Will provision devising the life insurance policy to beneficiaries other than the named beneficiary on the policy failed.
In Collister, the beneficiaries of the policy named in the Will had another argument for why the policy proceeds should be distributed to them, which also failed. The Will beneficiaries argued that because the life insurance policy’s named beneficiary was the Personal Representative of the estate, the testator’s intent was for the Personal Representative to distribute the policy proceeds pursuant to the Will’s terms. Washington courts have recognized that life insurance proceeds may be used to fund a testamentary trust. However, the Court of Appeals reasoned that although such trusts are permissible under Washington law, and that the testator in Collister appears to have intended to create such a trust for life insurance proceeds in her Will, the proceeds from the policy at issue were not subject to the trust because the beneficiary designation on the policy did not specify that the beneficiary was named in his capacity as Personal Representative. Because the policy identified an individual beneficiary, the court ruled that the proceeds were properly distributed to him.
Collister leaves us with quite a few estate planning lessons. Beneficiary designations are powerful, and the best practice is to keep beneficiary designations up-to-date. The result in this case illustrates why it is essential to discuss your beneficiary designations with both your estate planning attorney and your financial planner to confirm that your beneficiary designations will lead to your intended result.
Photo credit: Eli Duke on Flickr
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