A Good Estate Plan Needs More than a Will

When it comes to estate planning, everybody wants a Will.  Many people believe that good estate planning begins and ends with having a Will and they think once they have a Will, all their estate planning problems have been solved.  But unfortunately there is much more to the story than that.  While we do not disregard the importance of having a Will, consider some of the basic limitations on what a Will can do for you.  For one thing, a Will does nothing for you until you are dead.  So it cannot help you plan for potential severe illness or other conditions resulting in physical or mental disabilities, or help you to tackle the potentially devastating costs of long-term care.  Then, you also need to recognize that a Will only addresses individually-owned assets which are not otherwise controlled by some mechanism of law or contract – your so-called “probate” assets.  Some “non-probate” assets are (1) jointly owned assets, (2) assets held in trust, (3) assets owned by a business entity, (4) bank accounts with a payable on death provision, (4) life insurance policies payable to designated beneficiary(s) and (5) retirement accounts payable to designated beneficiary(s).  We think that is a pretty big list of things not controlled by a Will!

Did you know an otherwise well-designed and comprehensive estate plan can be dismantled with a single piece of paper?  Depending on the composition of the assets in a decedent’s gross estate, all it takes is one outdated beneficiary designation to send a significant amount of net worth in a direction not at all intended by the deceased account holder, and perhaps absolutely contrary to the decedent’s wishes provided in their Will.  A 2009 United States Supreme Court case is an example showing just how much damage can be caused when a beneficiary designation is not properly updated.  See Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009).

William Kennedy was an employee of E. I. DuPont de Nemours & Company who participated in its savings and investment retirement plan (“Plan”).  The Plan rules provided that plan participants had the power to designate beneficiary(s) to receive all or certain portions of the funds upon the death of the participant.  The rules further provided that if an account participant died without a surviving spouse or a designated beneficiary, then the remaining funds would be distributed to the participant’s probate estate.  In 1971, Kennedy married Liv Kennedy and in 1974 he named Liv the sole beneficiary of his Plan account.  William and Liv later divorced in 1994.  Although their divorce decree included a provision whereby Liv gave up any rights she had in any of William’s retirement accounts, William did not update or otherwise change his DuPont Plan beneficiary designation. 

When William died in 2001, there was approximately $400,000 in his Plan account.  His Executor requested that DuPont distribute the Plan proceeds to her as part of his probate estate.  Instead, the Plan administrator distributed the $400,000 to William’s ex-wife, consistent with the beneficiary designation it still had on file from 1974.  William’s Executor then brought suit against DuPont and its Plan administrator, arguing that the terms of the divorce decree controlled and superseded the older Plan beneficiary designation.

The lower circuit court granted summary judgment in the favor of William’s estate but the U.S. Fifth Circuit Court of Appeals then reversed the lower court decision.  The U.S. Supreme Court then agreed to hear the case and the Court unanimously held that William’s ex-wife was entitled to receive all of the Plan assets.  Ultimately, without questioning the validity of the divorce decree, the Court recognized that the decree was never filed with the Plan administrator.  Therefore, the Plan administrator had no way of knowing about the terms of the Williams’ divorce and the Court was unwilling to make that sort of due diligence an obligation of retirement plan administrators.  While the Court was sympathetic to the plight of the Executor, who happened to be William’s daughter, the Court nonetheless explained simply that “[t]he plan provided an easy way for William to change the designation, but for whatever reason he did not.”  As part of the facts presented in the judicial opinion, we learn that William participated in another retirement plan called the DuPont “Pension and Retirement Plan” and for that other retirement plan, William did in fact update the beneficiary designation after his divorce to provide that his daughter would be his beneficiary, not his ex-wife.  Knowing that William did update the beneficiary designation for one plan but the other likely made the justices even less sympathetic to the Executor’s situation.

A Will would not have helped William in this case.  The Kennedy opinion does not tell us if William had a Will when he died.  But it is reasonable to infer that if he had a Will, it likely left all of his assets to his daughter (which would be consistent with the plan beneficiary designation he did in fact update).  But that is immaterial to what actually happened.  Once the Court decided that William’s ex-wife was the designated beneficiary, entitled to receive 100% of what William left in his Plan account, then whether or not William had a Will and what that Will provided is all irrelevant.  If the Court had held otherwise and decided that William’s ex-wife was not the plan beneficiary because the divorce decree overrode the previously filed designation, then the proceeds would have been distributed to his Executor to be administered according to the terms of his Will (if he had one).  But unfortunately for William and his surviving daughter, that did not happen.

So in the Kennedy case, some $400,000 or so went to William’s ex-wife, not to his daughter as he clearly intended.  If he had only updated his beneficiary designation for that plan, then there would have been no issue and the $400,000 would have been distributed as he wanted.  Remember, part of good estate planning is making sure that beneficiary designations are filled out properly and that those designations are updated as time goes on and circumstances change.

Please call us at 860-769-6938 if you have any questions about the issues presented above or if you care to discuss any other planning issues with us.


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