What do IRAs, 401(k) plans, life insurance policies, and pay-on-death accounts all have in common?  Each of these assets is transferred on the insured’s or account owner’s death to the person or persons designated as a beneficiary of the insurance policy or the account. In California, these type of assets are not subject to a probate court proceeding on the insured’s/account owner’s death as long as the beneficiary designation for the insurance policy or account is properly completed. Upon the insured’s or account owner’s death (and after providing proper proof of death to the custodian of the insurance policy or account), the insurance proceeds or assets in the account will be distributed to the designated beneficiary (in accordance with the terms of the insurance policy or account).  The transfer of assets to a beneficiary of these types of assets is generally simple, quick, and cost efficient.

Problems arise when the beneficiary designation is not completed (at all), is not completed properly, or when the designated beneficiary predeceases the insured or account owner. When the beneficiary designation is defective, the asset must pass in accordance with the terms of the insured’s/account owner’s Will in a probate court proceeding. This is not a simple, quick, and inexpensive process.

A probate court proceeding may last anywhere from eight months to two years, depending on the size of the estate. There are many fees associated with a probate court proceeding, which include: court filing fees, probate referee appraisal fees, publication fees, bond fees, attorney’s fees and personal representative’s (Executor’s) fees. The personal representative’s attorney and the personal representative of the probate estate are each entitled statutory fees for ordinary services based on the gross value of the estate. The statutory fee for ordinary services for both the personal representative’s attorney and the personal representative is determined based on the gross value of the estate’s assets as following:

•4% on the first $100,000

•3% on the next $100,000

•2% on the next $800,000

•1% on the next $9,000,000

•0.5% on the next $15,000,000

•Reasonable amount for assets over $25,000,000

A probate is a public proceeding, so the decedent’s assets, income and expenses become a matter of public record.  Unfortunately, if a beneficiary designation for an insurance policy or an account is defective, that asset is subject to the time, expense and public transparency of a probate court proceeding.

I recently had two instances where new clients engaged me to assist them with probate court matters to probate assets that had defective beneficiary designations. In the first case, the two designated beneficiaries for an IRA (worth approximately $500,000) both predeceased the account owner. The account owner, unfortunately, never updated his beneficiary designations on the IRA before his death. So, he died with no beneficiary designation on his IRA, which required a probate court action to be opened in order to transfer the IRA. This probate court action for the IRA alone will cost $13,000 for the statutory Executor’s fee, $13,000 for the statutory attorney’s fee plus there are other costs associated with a probate court matter.

In the second case, the person failed to designate a beneficiary on an employee death benefit plan and a group term insurance policy (collectively worth $1,000,000).  As such, a probate court matter had to be opened in order to transfer these two assets.  This person died intestate (without a Will), so his assets will be distributed through this probate court proceeding to his next of kin, as determined under California law.  He may not have wanted his next of kin to be the beneficiaries of these assets. But, since he failed to complete the beneficiary designations on each asset, this is the result. The probate of these two assets will cost $23,000 for the statutory Executor’s fee, $23,000 for the statutory attorney’s fee plus there are other costs associated with a probate court matter.

All of the fees in these two matters could have been avoided if the deceased persons had just taken a few minutes during their lifetimes to properly complete and update the beneficiary designations on their assets. It is important to take the time to periodically review the beneficiary designations on your IRAs, 401(k) plans, insurance policies, pay-on-death accounts and other assets to not only make sure that they are properly completed, but to confirm that you still want to keep the person or persons you previously designated as your beneficiaries for these assets.

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com