Most individuals own assets that will pass upon the death of that individual pursuant to a beneficiary designation. In fact, in many instances, these types of assets make up a large portion of an individual's net worth. Examples of beneficiary designation assets include IRAs, company-sponsored retirement plans, life insurance policies, annuities, college savings accounts, health savings accounts, or bank accounts and brokerage accounts set up as "transfer on death" accounts. In order for the asset to pass to the intended beneficiary or beneficiaries, the account owner will need to complete and submit to the financial institution servicing and/or otherwise acting as the custodian of the asset a "beneficiary designation form" naming the individuals, trusts, or entities who will receive the asset upon the death of the account owner, or the death of the insured in the case of life insurance. The beneficiary designation forms, which are not standardized, are not typically required to be completed in the presence of witnesses, a notary public, or an attorney. In some instances, these forms can be completed and submitted online. Consequently, disputes over the execution of these forms can arise following the account owner's death when family members or loved ones discover that the account owner did not provide for them as they had expected.
What is a Beneficiary Designation?
The custodian of the account or life insurance company (for ease of reference hereinafter referred to as the "financial company") will usually provide the account owner with a beneficiary designation form upon establishing the account. In most instances, the beneficiary designation can be changed by the account owner at any time during the account owner's lifetime.[1] A beneficiary designation form will request the account owner to designate a primary beneficiary or beneficiaries and a contingent beneficiary or beneficiaries. The primary beneficiary will inherit first, and if the primary beneficiary is not then living or no longer in existence, the asset will instead pass to any contingent beneficiaries that the account owner has designated. The account owner will also identify the percentage of the asset to be distributed to each beneficiary. If the individual fails to designate any beneficiaries, then the asset will pass to the individual's estate or potentially the surviving spouse, depending on the terms of the contract.
How Does a Beneficiary Designation Work?
Assets with beneficiary designations are generally governed by contract between the account owner and the financial company. Thus, when the account owner or the insured in the case of life insurance dies, the asset passes directly to the beneficiaries named in the beneficiary designation form pursuant to the agreement between the financial company and the account owner or the insured. Assets that pass upon death by beneficiary designation operate independently of an account owner's Will or Trust Agreement. In other words, the beneficiary designation of an asset will not be subject to the dispositive terms of an account owner's Will or Trust Agreement unless the account owner's estate or trust is specifically named a beneficiary in the beneficiary designation. Often times, individuals use beneficiary designations as a way to avoid probate and to pass assets directly to the beneficiaries in a quick, easy and less expensive manner.
When Do Problems Arise with Beneficiary Designations?
The simplicity of passing assets by beneficiary designation comes with drawbacks. There are typically two scenarios that result in disputes related to a beneficiary designation: (1) challenges based on errors, omissions, or outdated forms that involve no malicious intent by a third party; or (2) challenges based on lack of mental capacity to execute the beneficiary designation, or claims which involve a third-party actor, such as undue influence, duress, forgery or fraud.
Often times, disputes arise out of an account owner's failure to update his or her beneficiary designation. For example, suppose an individual obtains a life insurance policy on his own life and designates his parents as the primary beneficiaries. The individual later marries and has a child, and even executes a Will or Trust, wherein he names the spouse and child as beneficiaries. If the beneficiary designation of the life insurance policy is not updated, the individual's parents, and not his spouse or child, will inherit the proceeds of this policy. Another common situation in which a dispute will arise is when the account owner makes a mistake on the form and unintentionally disinherits a family member. For example, suppose an individual named her two children as the primary beneficiaries of her life insurance policy. If the individual does not specifically indicate on the form that the descendants of a predeceased child will receive such child's share, then the descendants of the predeceased child will not receive any proceeds from the life insurance policy. Beneficiary designation forms may contain legal terms like "per capita" and "per stirpes" which can easily confuse the person completing the form. It is difficult to successfully challenge beneficiary designations based on errors, omissions, or outdated beneficiary designations because courts typically honor the contractual terms.
Challenges are not always based on innocent mistakes or the failure to update a beneficiary designation. Disputes might arise if the account owner lacked the sufficient mental capacity to execute a beneficiary designation, or if the beneficiary designation was the result of fraud or undue influence of a third party. Some of the common grounds for challenging a beneficiary designation involving a third-party actor include: (i) the beneficiary designation was a result of "Undue Influence," coercion or duress by a third party (e.g., the account owner was pressured or forced into signing the beneficiary designation through the acts of a third party); (ii) the change in beneficiary designation was induced by fraud or misrepresentation; and (iii) forgery. Challenges based on the foregoing typically occur when the account owner deviates significantly from his or her previous estate plan or beneficiary designation. These drastic changes usually arise later in the account owner's life when he or she is elderly and vulnerable.
What is the Legal Process to Contest a Beneficiary Designation?
Depending on the facts and circumstances, an action to challenge a beneficiary designation will be initiated in either a civil court or probate court. It is important that the appropriate court is chosen to avoid jurisdiction issues. The individual seeking to challenge the beneficiary designation must also have standing to bring the challenge. A person with standing to challenge a beneficiary designation might include: beneficiaries named in a previous beneficiary designation, heirs of the estate, beneficiaries of a trust, the trustee, or the personal representative of the estate. The person seeking to challenge the beneficiary designation must set forth the factual and legal issues supporting the challenge in the initial pleadings. If an individual has standing and the facts and circumstances warrant a challenge, the potential challenger should consider retaining an experienced probate litigator to perform initial due diligence to determine the validity of the claims.
Contesting a beneficiary designation is a complex and difficult process. Litigation can be costly, time consuming and emotionally exhausting. The assistance of an experienced attorney is essential in order to provide you with the guidance, advice and expertise required to contest a beneficiary designation in court.
