Life Insurance Mistake on Beneficiary

[Retiring_early_in_EastTN]

Hi all, so I have a question I have been pondering for about a week now. I'll try to give as much details as I can, but my mind is still very scattered right now so forgive me in advance if the post wonders about.

My husband passed away last year due to his heart valve replacement/repair being postponed due to COVID. It was rescheduled for early this year, but he didn't make it then despite his efforts of trying to let the doctors know how much worse he was feeling. :( This is very hard to process in it self.

This was both our second marriage and we have children from previous marriages. He named one of our good friends his executor and I am in touch with him on a weekly/daily basis sorting the will out.

From what we both understood he had two life insurance policies. One was 40% to me and one was 60% to his kids. The other one was 100% to a testamentary trust that was to be set up for his children to purchase a 20 year annunity. (I am not a huge fan of annunity, but it was what he wanted.)

Well. Imagine our surprise when the second insurance company sends me information to fill out because I am the 100% beneficiary of the second life insurance policy. I called to double check, even triple checked. I've sifted through paperwork at home and he wasn't the most organized in these areas.

So, I keep thinking this will get cleared up when they start processing, but in the back of my mind, I feel from what all I am being told, it all goes to me.  A few days later....yep, the money is direct deposited into my account. It is a decent sum. One couldn't live off of it forever, but one could buy a decent size house in our area with it if that gives you an idea about the $$$ amount.

Of course, I contact the exector and let him know and we are both dumbfounded. So, this brings me into the equation more than it did when I was just going to take my part of the first policy and be able to walk away and let his executor set up the annunities.

Side note - his adult kids and I get along well. There are no awkward step feelings and we still talk often when we run across something that reminds us of him. They do live in another state. They know they will be getting something, but aren't sure as to how much or what and think that the executor will handle everything (because that is what he told them and that is what we all thought.)

My husband was in the process of trying to update his will and make changes, however, he was very scattered the last few months about this and was feeling worse and worse. We were in and out of doctor appointments, the ER, etc.....there were many emails, spreadsheets sent out to me and his executor, but nothing changed on the will. And....we all know what trumps everything. The beneficiaries and then the will.

I met with a financial person last week to figure out how I can get this money in the hands of the trust without having implications for me. Even though this money is mine clear and free and there could be no questions asked, I know his intention, even if not followed through on paper, was to leave this to his two adult daughters. This does give me some flexibility if I want to structure it differently than an annunity (they are both early college age with no kids or family) and possibly let the money grow and the executor set up an annunity with the 60% he has and let them live off that for a few years.

This would put me in charge of the money and that may cause hard or bitter feelings. If it was my decision 100% I would invest it for long term, but his will AND emails, texts he sends to us state he wants it all in a 20 year (AAA rating) annunity, but, of course, since I now have the bulk of the money, it can be my decision.

But, again, that is not what he wanted.

So, question one - what do I do? The money will go to the adult kids. I can't keep it because it wasn't meant for me.

Question two- in one of his emails he changes the amount to go to me to 50% instead of the 40%. Now, I know I can't change beneficiary designation, but I could take that amount from the insurance policy that went to me if that was his intention (it ends up being 25k.) He words it that way in writing, but his numbers didn't reflect that.

I am very, very conflicted on what to do with this. My two biggest concerns are what do I do with the money that is best for the adult kids and do I keep the 25k?

Heeeellllpppppppppp!!

[cool7hand]

I used to work in the legal field, but this was not my area of expertise. You need a sophisticated trusts and estates lawyer who knows the law of your state (because both the feds and states have estate laws).

[former player]

It sounds to me as though the money from the life insurance policy came to you directly from the insurance company rather than being paid to the executor first.  That means that the will is irrelevant to the insurance money because it never became part of the estate.  That also means it's not something for the executor to deal with as part of your husband's estate, and actually never would have been. What there should have been is a separate statement from your husband (which is sometimes stated in the will for convenience but can also be in a separate document) that gives the person who is the executor a separate role as trustee for the proceeds of the insurance policy: the insurance policy should also have stated that the proceeds go to the trustee to put into an annuity for the benefit of your step-daughters.

As none of that happened, the money is yours free and clear in legal terms, but you want to dispose of it as your husband wished.  This should not be a problem legally speaking: what you can do quite easily is write a simple trust document (using a lawyer, though, of course - take the money for this from the insurance amount) that requires your husband's executor to act as trustee for the money on the terms your husband wanted.  You then transfer the money over to him and your part is done.  A variation on this, given that your step-daughters are now legally adult, is to consult them over what you are doing, so that you can understand how they feel about the annuity option as against the other investment options open to the trustee.  Given that they are adult, I don't think it is disrespectful to your husband's wishes to consult them and for you and the trustee take their views into account before formalising the disposition of the money.

The big complication in this is if this sum of money has an impact on any inheritance tax liabilities for the estate or for you.  If this is a possibility then you are going to need expert inheritance tax advice.

As to the other policy, I'm understanding that the policy gives you 40%, your husband later said in writing that he wanted to change this to 50% but never changed the policy to reflect this.  Legally the whole proceeds of the other policy are yours free and clear so there is no legal obstacle to your using part of the proceeds of that other policy to make up the difference if you wanted to.   I think though that this would be something to do very carefully, ensuring that both the executor and your step-daughters are fully aware of the full situation and are given copies of all the relevant documents and that you consult them before doing it, perhaps at the same time as you consult them over the terms of the trust you are setting up.   You sound as though you want to maintain good relationships and do the right thing, so I would hate to see you to end up posting in the inheritance gone wrong thread over what doesn't seem like a big amount in the overall financial picture.

[Chrissy]

So, question one - what do I do? The money will go to the adult kids. I can't keep it because it wasn't meant for me.

Morally and ethically, the money should go to the children.  That's the most important part, and everything else is is just details. 

However it happened, the money is now yours, and I think it's fine to use your judgement about HOW to give it to the children.  You may set up the trust the way your husband originally wanted.  Or, you may decide on a different investment than the annuity.  Or, you may give the money directly to his children, and just tell them what their father originally envisioned, leaving it to them to follow through. 

Question two- in one of his emails he changes the amount to go to me to 50% instead of the 40%. Now, I know I can't change beneficiary designation, but I could take that amount from the insurance policy that went to me if that was his intention (it ends up being 25k.) He words it that way in writing, but his numbers didn't reflect that.

It's fine to honor his intent by taking the money from a different pot.

I am very, very conflicted on what to do with this. My two biggest concerns are what do I do with the money that is best for the adult kids and do I keep the 25k?

Give them the money however you want, and, yes, keep the $25k.

I'm really sorry for your loss.  I'm sorry your husband's affairs aren't in the order he wanted, and that that creates stress for you.  You're doing great!  Anyone would be lucky to have you as their stepmother.  Thank you for trying so hard to do what's right and to be fair.

[Catbert]

Also make sure you understand how this "gift" to his daughters will affect your long term inheritance situation.  As I understand it (INAL) in the US you can gift 15K a year to anyone without filing any tax forms.  Above that you don't owe any tax immediately but must file a form with the IRS.  That gift above 15K is subtracted from your inheritance exclusion which is  currently 11 million.  Not sure if your total estate is anywhere near this, but worth taking to an attorney to ensure you understand any long term impacts.

I agree with OP and other posters that giving the daughters the money is some form is the right thing to do.  Keeping the 25K is fine.  I also think you can use your best judgement in how to give it to them...annunity, invested portfolio or cash.  I would talk to them as adults to see what they think.  Don't be in a huge rush to make decisions.  It's a difficult time for all of you.