Beneficiary Designations for Life Insurance & Other Nonprobate Assets: They’re Harder Than You Think– Posted by Christopher J. Yoson
When you are reviewing or revising your estate planning, it is very important to pay very close attention to how nonprobate assets will pass. Getting it done right is harder than you think.
“Nonprobate” assets, like retirement accounts and life insurance proceeds, are those assets that typically pass to intended recipients upon death by beneficiary designation (i.e., a contract with the financial institution) rather than through the decedent’s last will and testament. However, under Washington law, decedents are also allowed to dispose of these assets in their will, despite what the designation may indicate. More specifically, Washington’s “Super Will” statute (i.e., the Testamentary Disposition of Nonprobate Assets Act) requires that the nonprobate asset be specifically described in the will and that a beneficiary designation for that asset is not completed subsequent to execution of the will. RCW 11.11.020. In other words, the provisions in a will that directs the transfer of a nonprobate asset essentially “override” a previously completed beneficiary designation. Be careful, however, because a beneficiary designation completed subsequent to execution of the will overrides the provisions of the previously executed will – even if the subsequent beneficiary designation is later revoked.
Regardless of the manner in which you choose to dispose of a nonprobate asset (i.e., via beneficiary designation or by will), it is critical to ensure that the ultimate disposition of the asset is coordinated with the overall estate plan. For example, if a person’s will leaves the entire estate into trust for a spouse, children or other family members, the nonprobate asset should be structured to pass in a similar fashion (i.e., made payable to the trustee of the same trust) unless there is a specific reason for the asset to pass in a different manner (e.g., made payable to the estate to fund specific bequests). When nonprobate assets are structured to pass to someone in a fiduciary capacity, like a trustee or personal representative of an estate, it is also critical that the beneficiary designation (or will provision) specifies that capacity (e.g. “Jane Doe, as Trustee of the Children’s Trust”).
In light of the above, drafting beneficiary designations can be complicated and must be carefully considered when designing an estate plan.
The potential pitfalls in structuring beneficiary designations were made very clear in the recent Washington Court of Appeals case of Estate of Collister (195 Wn. App. 371 (2016)). In Collister, the decedent, Carol Collister, completed a beneficiary designation (with the insurance company) on one of her life insurance policies by naming her friend Rocky Feller (yes, Rocky Feller) as the beneficiary. That designation was completed in 2009. Incidentally, Feller and Collister had been previously married, but divorced in 2004.
In 2013, Collister executed a will, which named Feller as her Personal Representative and included a directive to distribute the proceeds of the life insurance policy to her two sisters.
Upon Collister’s death in 2014, the sisters petitioned the trial court to order Feller, as personal representative of Collister’s estate, to distribute the proceeds of the life insurance policy to them in accordance with Collister’s will. Feller argued that Washington’s “Super Will” statute prohibits a testator from designating a beneficiary of a life insurance policy via will and, therefore, the proceeds should be payable to him. The sisters argued that, as permitted under Washington case law, the will created a testamentary trust over the life insurance proceeds in favor of them. The trial court agreed with the sisters that such a trust was created and that, accordingly, Feller was obligated to distribute the proceeds of the policy to the decedent’s sisters.
On appeal, the trial court’s ruling was reversed and awarded the proceeds to Feller – but not because of his argument. Interestingly, the Court of Appeals court found that both parties’ positions were flawed. Specifically, the Court of Appeals ruled that Washington’s “Super Will” statute does not prohibit designating the proceeds of a life insurance policy by will – the statute simply does not apply to such designations. The Court of Appeals also ruled that, although you are permitted to direct the payment of a life insurance policy in your will, to do so a decedent must make the policy payable to the Personal Representative of the decedent’s estate. By naming Mr. Feller individually, and not in his capacity as Personal Representative, the directive in the will to make the proceeds payable to the decedent’s sisters failed.
In summary, you must be very careful to ensure that all components of your estate plan are properly coordinated. Be sure that you speak with your estate planning professional when dealing with nonprobate assets and beneficiary designations.