Beneficiary Designations on Will Substitutes

The classic methods of wealth distribution at death, via a last will and testament or intestacy, are widely used. In recent years there has greater use of "will substitutes" to transfer property at death. Similar to wills, where beneficiaries receive assets of the decedent after death, will substitutes also differ from wills due to title being transferred before death, allowing the avoidance of probate proceedings. Along with this difference, it is also important to note that, while wills are governed under probate laws, will substitutes are governed under the laws of contracts, allowing for the avoidance of many rules specific to the passage of probate property. Will substitutes can provide greater flexibility but, at the same time, be more limiting when trying to transfer assets at death. Common examples of will substitutes include transfer of death accounts, life insurance, pension accounts, joint accounts, revocable trusts. While there are many things that can be discussed with will substitutes, including their advantages and disadvantages in terms of taxation, the thing this post will focus on are the beneficiary designations, and the advantages and disadvantages over traditional wills.

The biggest advantage that will substitutes provide over wills is that it is substantially easier to change the beneficiary designation on a will substitute than a will. Changing a will, either through drafting a new will or amending a will through a codicil, can take considerable time and effort. Moreover, to change a will, the new will or codicil needs to be executed properly to be valid. Altering a beneficiary designation may be changed with just the submission of a document. Many companies allow you to change your beneficiary designations on-line for will substitute documents.

By only requiring the submission of a document, instead of a new will, several things are avoided. First, there is the ability to avoid messy proceedings involving lost documents, references to past documents, and reducing challenges to the validity of wills due to incompetence, lack of witnesses, or other probate specific challenges. This avoidance will save estates not only time, but also substantial money, and ensure that assets are distributed not as people believe they should be, but instead as the decedent believes they should be.

The beneficiary designations are not without their disadvantages. One major issue is the inability to specify contingent beneficiaries for each primary beneficiary, should the primary beneficiary predecease the owner of the account. For example, in a will, you could insert a clause saying:

"I leave my bank account in equal shares to my wife and two sons, Krik and Alan, with my daughter receiving my wife's share, should she predecease me, my brother, Sparky, receiving Kirk's share, should he predecease me, and my friend Hank Greenberg receiving Alan's share, should he predecease me, and the account being split evenly between surviving contingent beneficiaries, should a contingent beneficiary not survive me, along with all primary beneficiaries".

This clause allows the testator to specify who exactly receives and includes multiple variations if a beneficiary predeceases the testator in the will. However, under a will substitute, there is substantially less flexibility to choose alternate and contingent beneficiaries. For example, this annuity form from Liberty Mutual, under which contingent beneficiaries are only reached if all primary beneficiaries are deceased. Thus, if Steve, Gordie and Ted are listed as primary beneficiaries, at 50%, 30% and 20%, respectively, and Hank, Pavel, and Tomas listed as contingent beneficiaries, it would require the death of Steve, Gordie and Ted for any of the contingents to receive any amounts. This form does not allow for Hank to take Steve's share while Gordie and Ted are alive, as a will would, greatly decreasing the decedent's inability for the owner of an account to dictate to whom their funds are distributed. While this form does allow for a per stirpes distribution to the primary beneficiaries family, it still may not give testators the freedom they desire.

Another disadvantage is the ability to list classes. While in a will a testator may leave his assets to "his children" and cover children born both before and after the drafting of the will. Under this form, however, it is clear that you may not leave to a class, but instead must update it regularly. While this is not an arduous process, the stress of having a child is more than enough without having to immediately change beneficiary designation forms to ensure newborn children are not left without access to non-probate assets.

Despite the issues with almost every will substitute, there is still one substitute that allows owners to avoid many of the issues discussed above for both wills and will substitutes. Revocable trusts give owners the ability to easily change beneficiary designations, just as other will substitutes allow, but an advantage over wills. They also give greater freedom to designate contingent beneficiaries, much like wills but unlike will substitutes.

Basics of Estate Planning: What is Simultaneous Death?

Everyone has heard the about how the entire Presidential line of succession is not allowed in the same room at the same time due to the risk of them all perishing at once. A similar issue, called simultaneous death, is a concern in estate planning. Simultaneous death is a particular concern for husbands and wives, as they are more likely to designate their spouse as beneficiaries, and more likely to spend significant time together. But what exactly is simultaneous death? While on its face it may seem obvious, that simultaneous death would be the death of two or more people that occurs at the same time, there is actually slightly more to it. This is because individual state laws have extended the definition of "simultaneous" beyond what you would find in the dictionary.

The District of Columbia defines "death" when an individual "who has sustained either: (1) irreversible cessation of circulatory and respiratory functions; or (2) irreversible cessation of all functions of the entire brain, including the brain stem; is dead". The law in Virginia is a bit more in depth, however, though the definition is still generally the same. Under Virginia law, death is pronounced when "there is absence of spontaneous respiratory and spontaneous cardiac functions" and, because of disease or time "attempts at resuscitations would not ... be successful in restoring spontaneous life-sustaining functions". Virginia further states that if “there is the absence of brain stem reflexes, spontaneous brain functions and spontaneous respiratory functions” and if a physician does not believe it can be restored successfully, then death will be “deemed to have occurred at the time when these conditions first coincided”. Maryland has similar provisions defining “death” as Virginia does.

Should death be deemed to have occurred, the question is then when the death happened. While it is without a doubt important to know the time of death for a single individual, it is even more important when gauging if simultaneous death occurred. The reason this becomes important is because who died first will impact the appropriate transfer of property that results from death. We went to ensure that property passes, per the decedent's wishes.

Normally, when a person dies, their property passes to whomever they designate as a beneficiary. Generally, upon the beneficiary's death, property then passes as the beneficiary sees fit. However, if the beneficiary predeceases the decedent, the property would either pass to the decedent's secondary or contingent beneficiary, or to the decedent's estate.

The question in a simultaneous death scenario is whether the beneficiary survived the decedent, and who should get the property of the decedent. Normal logic would suggest that merely surviving the decedent by a minute would allow the property to pass to the now deceased beneficiary. If you have been reading this newsletter for some time you know, the law is quite different. Virginia (here),(here) and (here and the D.C. Code (here),(here) and (here) each state that for an individual to take from a decedent's assets the individual/beneficiary must survive at least 120 hours (5 days) after the death of the decedent. Maryland requires a longer survivorship period - 30 days - before an individual can take.

To give an example, imagine husband Harry and wife Wendy are in a car accident together. Harry and Wendy are residents of Virginia. Wendy is Harry's beneficiary on all his documents. Fred is Harry's contingent beneficiary. Gayle is the beneficiary on all documents of Wendy's documents. Should Harry die on the scene, the question is who would then inherit Harry's property. Should Wendy also die on the scene as well, all of the Harry's property would pass to Fred, and not to Gayle. Harry's documents govern passage of property due to simultaneous death. Should Wendy survive 144 hours, eclipsing the 120-hour requirement, the property would instead pass to Gayle. Wendy's documents govern the distribution of Harry's property, not Harry's documents. Simultaneous death has not occurred. But, if Harry and Wendy were residents of Maryland, then Harry's documents would still control.

It is still important to remember, like most estate planning issues, the 120 hour requirement or the 30 day requirement can be modified under your estate planning documents to provide for a longer survivorship period requirement.

Estate of the Month: A Clear and Present Danger Estate Plan

Growing up during the tail end of the Cold War, one of my favorite authors at the time was Tom Clancy. Clancy was the author of such techno-thriller books as Patriot Games and The Hunt for Red October. Unfortunately, I think law school ruined his writing for me as I never did read many of his more recent endeavors. Regardless, his estate has become a clear and present danger of what not to do.

Clancy passed away on October 1, 2013 at age 66. After a lifetime filled with 17 bestsellers, more than 100 million copies in print, and numerous movie and videogame spinoffs of his works, Mr. Clancy was able to amass a considerable estate. His will, dated June 11, 2007, was filed with the State of Maryland on October 10, 2013. In addition to his will, Clancy had executed two codicils on September 18, 2007 and July 25, 2013 that amended his will. Clancy's will named Mr. J.W. Thompson as personal representative. Despite being entered into probate over 15 months ago, the estate is still open, challenges continue to be brought, and memoranda have been filed as recently as the 10th of February.

The estate itself is valued at approximately $82 million, and includes a variety of property, including:

• A condominium in the Ritz-Carlton in downtown Baltimore,
• A World War II tank (Yes, that is the tank he owned in the picture),
• A $65 million ownership interest in the Baltimore Orioles, worth 12% of the team,
• Numerous business interests based off of his literary works,
• Intellectual property from his literary works,


• Assorted personal property
• A former summer camp turned estate that includes a mansion overlooking the Chesapeake Bay valued between $4.6 million and $6.9 million, and
• A house on Martha's Vineyard

As can, sadly, be expected with an estate of this size, and with requests of this complexity, there have been complaints raised by several heirs. Some initial issues have included enabling the personal representative to sign off on business deal, paying income taxes, caring for the Chesapeake Bay mansion, transferring tangible property to Mrs. Clancy, and paying an invoice to the gun dealer storing Clancy's firearms collection. In the normal estate administration, these are all typically handled by the personal representative without seeking a Court ruling.

The main issue in the estate revolves around the family trust. In the 2013 codicil, Clancy stated that no assets should be included in Alexandra's trusts that would require her to pay estate taxes. This makes a great deal of sense given that under the marital deduction provisions that spouses can transfer assets, with unlimited value, back and forth between each other. This avoids paying the any estate tax until the passing of the surviving spouse.

However, the personal representative for the estate has proposed that the $16 million tax bill Clancy's estate will incur should be shared equally out of Alexandra's trust and the family trust. Alexandra's attorney claims this would cause an unnecessary tax burden of at least $6 million on her, and sought to have him removed as personal representative. Alexandra's attorney filed a petition to remove the personal representative. There has still been no ruling on the petition, despite rulings on several other motions and requests including an order to sell real property (9/17/14), allowing fees to be distributed (1/22/15), and granting the PR access to real property (1/12/15). Most recently, on 2/10/15, a response was filed on behalf of the estate by the personal representative, J.W. Thompson Webb, in response to a memorandum filed by Alexandra.

Further updates are still pending, but the entire process will undoubtedly be at least several months, or even years, longer. I will keep you updated on any changes.