A Cautionary Tale: Beneficiary Designations

At Johnson, Gasink & Baxter, LLP every client with a trust-based plan has been given custom advice and instruction on “funding” their trust with their assets. Unfortunately, not everyone gives trust funding its due respect, and some clients fail to fully fund their trusts. When it comes to funding a trust, I can provide the advice and direction, but the responsibility is really on the client to physically carry out my directions. For many of my clients I wish I could walk into their bank and change their accounts for them. Even if my client wanted me to change their accounts for them, the plain and simple truth is that financial institutions will not let me change the title on the savings accounts or the beneficiary of the life insurance or IRA because I am not the account owner. Without appropriate account designations, it’s unlikely an estate plan will flow with the same precision and intended outcome.

I recently had a client pass away with a revocable living trust in place. On all fronts it appeared the administration was going to be concise and simple because my client had dedicated significant time and effort to fund his trust. The administration was flowing smoothly until we were thrown a curveball; his checking account didn’t have a beneficiary. My client had simply forgotten to add a Transfer-on-Death designation (TOD) to the account (as indicated on his trust funding instructions). For those of you unfamiliar with a TOD, these designations are routinely used with bank and financial institution accounts. Upon the death of the account owner, these designations cause assets to pass directly to named beneficiaries. A TOD designation can avoid the cost and hassle associated with Probate.

At the time of my client’s death, his checking account had a balance of $11,000.00. The trustee and I were initially relieved at the relatively low account balance because The Virginia Small Estate Act (Virginia code section 64.2-600-604) would likely apply. The act permits the executor to take possession of the decedent’s assets and distribute them pursuant to the terms of the decedent’s will so long as the total estate value is less than $50,000.00. In simple terms, the named executor could transfer the $11,000 checking account to the beneficiaries without initiating a formal probate. My firm took the initial steps to prepare the paperwork and submitted it to the financial institution. It should be noted that I have personally administered these types of transactions numerous times before and they have all been resolved without a single problem.

In this instance the bank was unwilling to accept the Virginia Small Estate Act Affidavit because the checking account was not initially opened in Virginia. Keep in mind my client was a Virginia resident, had lived in Virginia for many years, and had died in Virginia. Without the acceptance of the Virginia Small Estate Act Affidavit, the trustee/executor was forced to travel to another state and initiate formal probate proceedings. To add insult to injury, the state where the account was originally opened does not have the same type of streamlined process for minimally valued assets like Virginia.

The trustee/executor was simply furious with the bank because there was no legal requirement for probate to be initiated in the state where the account was opened. The bank was following its own internal procedures that required probate in the state where the account was initially opened. I went through various channels to appeal to the bank’s legal department, but they were simply unwilling to concede. Given that most of us have lived in many different states during our lifetimes, this should serve as a warning to us all to confer with your bank regarding their account policies.

In summary, I implore you to fully follow the trust funding instructions provided to you by your attorney. It may seem that an undesignated small account shouldn’t be any trouble, but that is clearly not always the case. For those clients who have chosen a Will-based estate plan, beneficiary designations are still very integral to your plan and should also be given their due consideration. If you have further questions or concerns regarding account designations for your JGB estate plan, please contact our office and we can set up a time to discuss your concerns further.

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