How financial institutions can sabotage your estate plan

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Beware of your financial institution. This can be the downfall of your estate plan.

You and your financial institution have a contract. The terms of this contract can be found in your bank account signing card, beneficiary agreement or similar account agreement. You signed it when opening your account.

Financial institutions can, through their contracts, place restrictions on how you style your accounts and name beneficiaries. These restrictions often mean that your accounts will not work the way you expect when you die.

Suppose a widowed mother has three adult children (Billy, Susie and Al) and six grandchildren (each child has two children). She wants everything to go to her adult children when she dies.

Mom conscientiously visits a lawyer to draft her will. The lawyer asks him, “What if one of your children dies before you do?” Mom thinks carefully and says, “I want their children to have their share.” The lawyer writes it as “all to my children in equal parts, by strains”. The phrase by stem means that the share of the deceased child will go to the descendants of that child.

The next mom visits her friendly banker and says, “I want everything on my account to go to my children when I die.” The banker gives him a beneficiary card, which contains a blank for the name of his beneficiaries. By writing in very small letters (because it is a very small white one), mom spells out the names of her three children. There is no second blank for contingent beneficiaries.

Then, tragically, Mom and her youngest child, Al, are killed in a car crash. The assets in Mom’s will are split as she wanted: Billy gets a third, Susie gets a third, and Al’s third is split between her two children.

This is not the case for the bank account. With its designations of beneficiaries, it is entered into by contract and not by will. When Al died, so did his part. The money in the bank account is divided equally between Billy and Susie, the two surviving children. Al’s children are left with nothing.

Why? Because the bank’s form did not allow language by strain or the designation of potential beneficiaries. The bank can get away with it because it’s big, it sets its own rules and has nothing to explain to anyone.

This is just the start of possible bad results. For example, many banks will not allow a trust to be named as beneficiary unless it has a current tax ID number. This, of course, will not exist if the trust is in the will. Most banks do not allow a category to be designated as a beneficiary, such as “all my grandchildren”. Some banks require that all accounts held in common be held “with right of survivorship”, which means that the deceased’s share automatically goes to the other account holders.

There is an even more frightening problem: the disposition of your account if all of your named beneficiaries die before you do. Some institutions will pay it to your estate, while others will pay it to your legal heirs. Do you know how your bank will pay it?

What are your options? Persuade your institution to allow you to make your beneficiary designations on a separate sheet of paper. Have your beneficiaries sign a contract that can take precedence over the designations. Take your lawyer with you to talk to your banker.

But the best option? Move your account to a more user-friendly institution.

Virginia Hammerle has practiced banking law, trial law and estate planning for almost 40 years. She is president of the law firm Hammerle Finley and is certified in civil trial law by the Texas Board of Legal Specialization. You will find other blogs on www.hammerle.com. E-mail [email protected] to be added to the firm’s monthly newsletter.


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