Life Insurance, IRA Accounts & Probate

Life Insurance and retirement accounts are designed, if all goes right, to pass to beneficiaries without probate but there can be some challenges.

Beneficiary Not Named Or Has Died

Life insurance and retirements accounts are designed to have payable on death beneficiaries so that they do not need to go through probate when the account owner dies. But many people never fill out the beneficiary form, or else, a beneficiary dies and the account owner fails to name a new beneficiary. If a beneficiary is not named on a life insurance policy or retirement account the asset will have to go through probate unless a retirement account is set up like a trust that has its own internal rules as to who get the assets if account holder dies. However, this is not the common situation. Also, it sometimes happens that the name of the beneficiary as written on the pay on death form differs quite a bit in spelling from actual name of the beneficiary and we have seen cases where the financial institution holding the account refuses to pay without a court order so the account goes into probate.

Example Scenario: Probate Despite Beneficiaries Named.

For example, John and Mary are married and have three adult children. John's life insurance policy might provide for Mary to be the primary beneficiary which means that if she is alive when John dies, she get the entire policy. It might provide for each of the three adult children to be secondary beneficiaries meaning that if Mary is not alive when John dies, the benefits go one third to each of the adult children. In this example, if one of the three adult children died before John died, and Mary also died before John died, then the benefits would go one third to each of the two surviving children but the one third benefit to the predeceased child would have to be probated. Or, maybe John didn't list a secondary beneficiary and only listed Mary as the primary beneficiary. In that case, if Mary died before John, the entire policy benefit would have to go through probate.

The Value of a Trust. In the example immediately above where John wants the proceeds to go to Mary if she survives him, otherwise to his 3 kids, he could make Mary the primary beneficiary and the Trust the secondary beneficiary. The Trust could then specify that (since it wouldn't come into play on the account unless Mary predeceased him) that the money would go in equal shares to the surviving children of John or it could also specify that if a child of John also predeceased him, the predeceased child's share would go to any surviving children of the predeceased child.

NOTE: Occasionally a big employer setting up retirement accounts will have language in the accounts to the effect that if the account owner dies with a surviving spouse, he or she get the account and if the account owner dies without a surviving spouse, the account is divided among the account owner's children. But this is the exception, not the rule.

Dealing With Life Insurance Companies or Holders of IRA or Retirement Accounts

One of the problems heirs encounter in dealing with life insurance companies or holders of IRA or retirement accounts is that, say, the adult child of a man who has just died can't call up the life insurance company or retirement account custodian and say, "Who gets the benefits?" The answer will be, "Sorry, due to privacy laws, we can't talk to you unless you can produce Letters Testamentary or Letters of Administration showing that you have been appointed representative of the estate."

The problem with that answer is that if there are living beneficiaries to account for all of the life insurance proceeds and retirement accounts it may not be necessary to undertake a probate or it may be possible to do a simplified probate procedure (Set Aside Without Administration) that doesn't provides for Letters Testamentary or Letters of Administration.

To solve this problem everyone who thinks that they are a possible beneficiary of a life insurance policy or retirement account or IRA can write the relevant company and enclose a certified copy of the death certificate and say something like, "Enclosed is a certified copy of my father's death certificate. I am a beneficiary under his ________; please send me my benefits." If you are indeed a beneficiary the company should pay you although they may send you a bunch of forms to fill out. If you and all other logical heirs fail to collect all of the benefits, then you know that some or all of the benefits must go through probate.