August 20, 2010 Show:

Tenancies by the Entireties and Third-Party Beneficiary Directions



I began the August 20 program by recapping the main points of the previous programs and the discussing a recent United States Supreme court decision (Estate of Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct.865 (2009)) that had made clear once again the paramount importance of making the proper designation of intended beneficiaries under retirement plans. There, the decedent has long been divorced and his ex-wife had expressly waived in the divorce decree any interest in his account benefits under his employer’s savings and investment plan. However, for whatever reason, the decedent’s lawyer had not memorialized that fact in the form of a Qualified Domestic Relations Order (which must, among other things, designate an alternate payee to the divorced spouse), nor had the ex-wife disclaimed her interest in the plan in the particular manner required by the plan to override her continued designation as the sole beneficiary. In those circumstances, the plan documents (including the concededly unintended beneficiary designation of the long-divorced ex-spouse) trumped the language of the divorce decree itself because of the preemptive effect of ERISA (the federal Employee Retirement Income Security Act) over state law. Thus, the ex-spouse took everything.

I next explained that even properly drawn beneficiary designations of retirement plans or life insurance policies provide no asset protection whatsoever against the creditors of the beneficiaries themselves unless the assets are held in trust. Trusts are also the surest way of achieving a “stretch-out” of distributions from inherited retirement plans so that only the required minimum distributions are made from them except in exigent circumstances and as much as possible of the principal can continue to grow and compound on a tax-deferred basis. However, a few IRA custodians also now offer accounts that permit such a stretch-out.

Third-party beneficiary designations are not limited to retirement plans and life insurance. They may include bank accounts, securities accounts, and, indeed, most types of assignable contractual rights. Indiana’s new Transfer on Death (“TOD”) statute even permits the designation of a transferee on death for real property.

All these designations - - to reemphasize a point made in the first presentation in this series - - control over contrary provisions in wills, and property that is passed by means of such designations is not probate property (unless the designation lapses for one reason or another and there is no contingent beneficiary).

I next quoted a list of common mistakes made in beneficiary designations, from a recent article that somewhat strangely did not refer to the use of trusts. The important general point to take away from that list and from the whole program is that the owners of the property rights covered by such designations must be extremely careful about the details of the designations and must know exactly what they are doing. (Never, for example, name a minor as the designated beneficiary of a life insurance policy or else the insurance company may require the establishment of a guardianship to receive the proceeds or even withhold them until the minor reaches the age of majority.)

With all the emphasis on beneficiary designations, there was relatively little discussion during the program of tenancies by the entireties. However, in Indiana especially, such a form of joint ownership of any real estate, not only homestead property, between spouses is an important means of asset protection. One of the key benefits is that the creditors of either spouse but not both spouses may not levy upon the real estate held in tenancy by the entireties while the marriage lasts (or even afterward if the debtor spouse dies first), although there is an exception for federal tax liens.

 There is in Indiana the possibility of achieving at least some of this indispensable asset protection in rare cases by specifying in the beneficiary designation of a life insurance policy or annuity contract that the beneficiary may not “commute, anticipate, encumber, alienate or assign” any benefits. However, astonishingly enough, this possible protection only applies to life insurance or annuities issued by an Indiana life insurance company. Burns Ind. Code Ann. § 27-2-5-1 (2010).

If there are any questions about any of these important matters that the listeners wish to ask, I remain eager to answer them subject to my previously stated caveat that such answers should not be construed as particularized legal advice or as indicative of an attorney-client relationship. Please feel free to email in those questions to me at thelakeshorelawyer@lakeshoreptv.com.