Monday, August 8, 2011

What if my Texas Will says something different than my Beneficiary Designation?

People often make “beneficiary designations” when they open bank accounts, investment accounts, retirement accounts and similar types of accounts, or when they obtain life insurance policies or similar contractual agreements. But what if your account or policy identifies a different beneficiary than under your last Texas will and testament? If you are an estate representative or account manager faced with such a conflict, what happens?

All other things being equal, if your will and your beneficiary designation are in conflict, Texas courts will enforce the beneficiary designation rather than your will. To understand why this is the case, it helps to realize what makes wills and beneficiary designations different. Both serve to transfer assets or property after death, but wills only affect “probate assets” and do not affect “non-probate assets.”

Determining what is and what is not a “probate asset” is a topic for another blog entry, but essentially your accounts and life insurance policies are considered to be a contract between you and the broker/entity who manages that asset. Your contractual agreements concerning a beneficiary designation make that account or policy a “non-probate asset” – unless you have designated your own estate as the beneficiary, or you have named someone who is incapable of receiving the benefit (such as someone who died before you, a spouse you have divorced, or a minor child).
Take, for example, a life insurance policy where Husband names Wife as his beneficiary during their marriage, but then divorces Wife. If Husband marries New Wife (and creates a will bequeathing “everything I have” to her), the policy will be paid to New Wife as the beneficiary identified in his will upon Husband’s death. Although the beneficiary designation would normally obligate the insurance company to pay the Ex-Wife, and the funds would automatically pass directly to her under the insurance contract, Texas has passed statutes which typically render that beneficiary designation invalid since most people would not have wanted that result to occur (Ex-Wife benefiting over New Wife). However, Texas courts have held that if the insurance company did not receive notice of the divorce before it paid the policy proceeds to Ex-Wife, New Wife will be stuck trying to recover the funds from Ex-Wife and has no recourse against the insurance company.

End result: everyone is going to be fighting (probably in court) over who gets the insurance proceeds, making the transfer of Husband’s insurance proceeds to his intended beneficiary (New Wife) much more expensive and time-consuming – and hopefully, Ex-Wife hasn’t spent all the money by the time New Wife gets a judgment awarding her the policy proceeds.

To avoid this problem, check your beneficiary designations periodically and make sure that they are up to date and do not conflict with the terms of your will or your overall estate plan.

Blog prepared by Matt Lloyd.
Blog edited by Austin Attorney Cynthia W. Veidt.