When is Probate Needed to Collect an IRA or Life Insurance Proceeds?

One of the things that makes Probate so complicated is understanding what assets a deceased person owns that must go through Probate and what assets can be collected by just showing a Death Certificate. Generally speaking, any asset that has a “beneficiary designation” can be collected by simply showing a Death Certificate, no Probate needed. The most common beneficiary designated assets would be Life Insurance proceeds, IRA proceeds and Annuity proceeds. However, sometimes Bank Accounts and other financial assets have a designated beneficiary and need not go through Probate so long as an appropriate beneficiary has been properly designated.

However, it is possible that the decedent failed to properly designate a beneficiary of these financial instruments and a Probate is needed. Also, it is also possible that the designated beneficiary of such financial instrument predeceased the decedent and there is not a “contingent beneficiary” designated. Furthermore, someone other than the designated beneficiary may contest the beneficiary form and assert that they are the appropriate legal owner of such asset. Any one or more of these scenarios would trigger a Probate.

No Beneficiary has been Properly Designated:

I am always surprised to learn of situations where a decedent failed to name a beneficiary over his or her IRA or Life Insurance policies. I guess there are many reasons that could be asserted for this negligence, but in my experience it is mostly caused in situations where the decedent didn’t have an Estate Planning Lawyer, or a professional IRA Investment Advisor or an appropriate Life Insurance Agent. Perhaps they purchased such products online believing that it wasn’t important to have a professional advisor. Or perhaps the decedent filled out some paperwork believing that they had designated a beneficiary when in fact the form was inadequate or was the wrong form. Whatever the reason for the failure of such a simple task, it will make getting this asset paid out more time consuming, cost more money and the ultimate recipient may not be what the decedent had intended. In all of these financial types of assets there is some sort of Contract or Operating Agreement that was completed by the decedent when such instrument was purchased. The boilerplate provisions of that Contract or Operating Agreement will dictate who is the recipient of such asset upon the failure of the beneficiary designation. In most cases, the Contract or Operating Agreement will specify the “Estate” as the appropriate beneficiary. Whenever you hear the legal term of an “Estate”, then you should be thinking Probate.

The collection of such assets is subject to the Probate Court and is collected by the Executor as a Probate Asset. It is also subject to the general creditor claims of the Probate, even though such assets would have probably been free of creditor claims had it appropriately designated a beneficiary. The ultimate recipient of such proceeds, after creditors have been satisfied, and Probate fees to the Attorney’s, CPAs and the Executor have been paid, will be determined by the Last Will and Testament of the decedent. If the decedent did not have a Will, then the recipient of the proceeds of such instruments will be determined by the State’s Intestate Succession Laws and may certainly go to a beneficiary that the decedent didn’t like. Furthermore, the timing of the payout of the asset will be delayed until the Probate process is entirely completed which is likely to be a year or more from the decedent’s death.

Wow, how much simpler and easier would it have been for the decedent just to properly name and designate a beneficiary over his or her Life Insurance or IRAs. This amplifies the need to have the appropriate professional guidance of an Estate Planning Lawyer, or a Financial Advisor or a Life Insurance Agent. In the end, trying to save a few bucks and “do it yourself” ends up being a costly and time-consuming mistake. You are seeing the need to have your Estate Planning Lawyer not only draw up the legal documents of a Will or a Trust, but also the need to coordinate the beneficiary designations in all of your financial instruments like Life Insurance proceeds and IRA proceeds.

A Beneficiary was Designated, but they Died Prior to the Owner’s Death:

Another common scenario is the failure to timely and regularly review and update the beneficiary designations over all of your financial assets. The most common scenario here is that a spouse or a son or daughter was named as the beneficiary, but that person died prior to the decedent’s death and a change was never made to the beneficiary designated. This is another example of a mistake made by not getting the appropriate financial or legal advice at the death of a loved one.

Now the question becomes, “Who gets it?” The easy answer is the “contingent beneficiary”, meaning the second person that was designated as the backup beneficiary on the beneficiary form. But wait, there is no contingent beneficiary named? Ok, we are back to looking at the provisions of the Contract or Operating Agreement to see what it says, and most likely we will see the words “the Estate”. This means Probate as we learned above. And this means all of the complications we discussed above. Don’t blame this on the Probate Attorney, blame it on the advisors or lack of advisors of the decedent.

A Beneficiary was Appropriately Designated, but Someone Else is Going to Contest It:

The most common scenario we see at Jet Probate is the failure to change the beneficiary designation after a divorce or maybe the designation says, “my spouse” and the spouse at the time of the decedent’s death is quite different then the spouse at the time of the designation. Not only is this “mess” going to go through Probate, but it is going to be a “litigated issue”, meaning more lawyers, more time, and more expense. Also, community property laws may come into play and whether or not the Life Insurance premiums or the IRA contributions were made from “community assets”.

Or maybe one of the kids was designated as the beneficiary, but the other children are upset with that singular designation. And it gets even more complicated if the child that was designated was also the person that was “helping mom or dad with their legal affairs”. What if the designation of the IRA or Life Insurance Proceeds were filled out by the son or daughter who is named to get the proceeds and that son or daughter also was acting under a Power of Attorney. That is certainly a legal battle because the son or daughter acting under the Power of Attorney would owe fiduciary duties to mom or dad meaning they would have to follow mom and dad’s wishes. Those wishes could be easily ascertained by looking at who the beneficiaries are under mom’s or dad’s Will or Trust. Certainly, there may be reasons why they are different, but in most cases they should match up consistently.