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An Estate Planning Horror Story

Beneficiary designation disastersNo matter how busy you might be, it will only take a moment to fill out your beneficiary forms.

Regardless of your income or net worth, there’s one estate planning task you should do right now: check the beneficiary designations for your life insurance policies, bank accounts, brokerage firm accounts, and retirement accounts. You should update these forms as necessary. If you don’t, the consequences can be dire.

The Fifth Circuit Court of Appeals reversed the trial court by finding that a pension plan administrator didn’t abuse her discretion in determining that a deceased plan participant’s stepsons weren’t considered his “children” under the terms of the plan. As a result, the deceased participant’s siblings, not his stepsons, were entitled to inherit the plan benefits in Herring v. Campbell (5th Circuit 2012).

In that case, John Hunter died in 2005. He had retired from Marathon Oil, where he was a participant in the company pension plan, which let him name a primary and secondary beneficiary. Hunter designated his wife as the primary beneficiary but didn’t designate any secondary or “contingent” beneficiary. After his wife died, he didn’t update the document to add a new primary beneficiary. Under the plan’s terms, when a participant died without designating a valid beneficiary, the deceased participant’s benefits were distributed in the following order of priority: (1) surviving spouse, (2) surviving children, (3) surviving parents, (4) surviving brothers and sisters (siblings), and finally (5) participant’s estate.

After he died, the plan administrator rejected the claim that Hunter’s two stepsons would qualify as “children” who’d be entitled to all the benefits. Instead, the plan administrator distributed the benefits of more than $300,000 to Hunter’s six siblings.

The stepsons sued for the benefits, claiming that they were, in fact, Hunter’s children because, by his actions, he’d “equitably adopted” them. The evidence seemed to indicate that he probably did mean to leave his benefits to the stepsons, so the trial court concluded that the plan administrator abused her discretion by failing to consider the stepsons’ equitable adoption claim. But the plan administrator appealed to the Fifth Circuit.

The Fifth Circuit agreed with the administrator’s interpretation that the term “children,” and for purposes of the plan, it meant biological or legally adopted children as opposed to un-adopted stepchildren. The District Court’s decision was reversed, and Hunter’s pension benefits went to his six siblings.

Typically, whoever’s named on the most-recent beneficiary form will get the money automatically, if you die. This brings up another advantage of designating individual beneficiaries—it can help you avoid probate because the money goes directly to the named beneficiaries by “operation of law.”

Doing a beneficiary checkup and making any needed changes will take just a few minutes. Don’t wait, or it could be too late like it was for Mr. Hunter’s stepsons.

Reference: MarketWatch  (June 30, 2017) “Make this estate planning move right now: Check your beneficiary designations”

 

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