Your Payable on Death Beneficiary Just May Surprise You (Part 1)

I have posted many times on this blog about the reasons why you should have a will.  I have also written about certain types of assets that are not controlled by a last will.  One such type is contract property, which is any account that has a payable upon death (POD) designation which overrides the will.  It is important, therefore, to carefully plan whether to choose POD beneficiaries at all and if so, who they should be.

In the case of retirement accounts which have income tax implications, because these tax deferred accounts will potentially trigger a large income tax when the plan participant dies, it is especially important to make a careful choice.  A recent case in our office resulted in an interesting conversation about the line of succession to such an account.

A wife died and 10 days later her husband died.  They had no children and they left no wills.  Wife had a large 401k thru her employment.  She had completed a beneficiary form designating Husband as the beneficiary, but she did not designate a contingent (alternate) beneficiary.  We received the paperwork required to liquidate the account and transfer it to the rightful recipients.

Because the account is contract property, the POD designation takes precedence over New Jersey intestacy laws.  Since Husband survived Wife, it seemed to me that the account should be payable to him – or since he died after Wife but before he could complete the paperwork – to his estate.  What they told me, however, was a bit surprising.

More on that next week.