A $500,000 Estate Planning Mistake (Part 2)

                Last week we were talking about Mary, who is losing out on a $500,000 401k her husband left to her in his will.  So, why is the 401k custodian telling her she  isn’t entitled to it?

                The reason is that the will does not automatically control how all property passes.  It applies to what are called probate assets, those that pass by way of the will.  Non-probate assets, such as retirement accounts and other assets which have beneficiaries designated upon death, are not governed by the will.   That was Mary’s problem here.

                She asked me if I thought a lawsuit could force the 401k custodian to pay the account to her because the will clearly states John’s intent.  She showed me the paragraph which makes reference to the 401k and his desire to leave it to Mary.

                I told her about a case I had years ago which was similar to hers.  An attorney I knew filed a lawsuit to try to get a court to order the IRA custodian to pay a surviving spouse even though the beneficiary designation on file named someone else.  Not surprisingly he lost the case because the beneficiary designation trumps the will.  Retirement accounts are referred to as contract property.  There is a contract with the custodian that when you pass away they will pay the beneficiary whom you have designated and if there is none then the company has a predetermined set of beneficiaries (usually the “estate”) that they will pay.

                In that other case, the only option the surviving spouse had was to file a malpractice claim against the attorney who drafted the will because he should have known that leaving contract property by way of a will is impossible.   And that was the only option Mary had.  I couldn’t say whether she had a good malpractice claim.  She would need to speak to an attorney who does that kind of work.  But as far as getting it from the 401k account, I told her she’d lose out on the $500,000, a very costly mistake indeed.