Probate

Hyacinth Devereux names her three children as beneficiaries of her IRA "in equal shares, PER STIRPES." Her son Emlyn dies before her, survived by his own two children. On Hyacinth death, the account is divided:

1. A.One-half to each surviving child, with Emlyn children receiving nothingThat is the per capita result among surviving named beneficiaries, which is what per stirpes is written to avoid.
2. B.One-quarter to each of the two surviving children and one-quarter to each of Emlyn two childrenThat equalizes across four individuals, which is neither per stirpes nor the stated equal-share designation.
3. C.One-third to each surviving child, with Emlyn one-third split equally between his two children, one-sixth eachCorrect. The branch keeps its share and passes it down.
4. D.Entirely to Hyacinth probate estate, because one named beneficiary predeceased herA valid designation with a surviving contingent structure controls, and the IRA passes outside probate.

Why: Per stirpes means "by the branch." Each named child heads a branch, and a deceased child share drops down to that child own descendants. Emlyn one-third therefore splits equally between his two children, one-sixth each, while each surviving child of Hyacinth still takes one-third. Because a valid beneficiary designation controls, the IRA passes outside probate.

Rather than naming her two young children directly, Sunniva names the trustee of a trust she has created as beneficiary of her 1,200,000-dollar policy. What does this accomplish?

1. A.It makes the death benefit income-tax-free, which it would not otherwise be.Death proceeds are generally excluded from the beneficiary's gross income whether the beneficiary is an individual or a trust. Naming a trust changes nothing about that.
2. B.It automatically removes the proceeds from the insured's taxable estate.Estate inclusion turns on who OWNED the policy and held the incidents of ownership, not on who was named beneficiary. An owner who names her own trust still owned the policy.
3. C.It puts a TRUSTEE in charge of investing and distributing the proceeds under terms she wrote, avoiding outright payment to minors and a court-appointed guardianship.Correct. The trust instrument controls timing, purposes and conditions of distribution, and the trustee is accountable to the beneficiaries for carrying it out.
4. D.It guarantees the children will receive the money at age eighteen.The trust terms decide when and how distributions occur, and a common reason for using one is precisely to delay outright control well past age eighteen.

Why: Naming a trustee puts a fiduciary in charge of receiving, investing and distributing the proceeds according to terms the policyowner wrote herself. She can specify ages, purposes and conditions for distribution, provide for a disabled child, and avoid both the delay and the rigidity of a court-supervised guardianship for minors. The trustee is accountable to the beneficiaries and is bound by the trust instrument.

Marguerite owned a 900,000 dollar policy on her own life and named her son directly as beneficiary. At her death the insurer pays him promptly and the money never passes through her will. Her executor nonetheless lists the 900,000 dollars on the federal estate tax return. Is the executor correct?

1. A.Yes; naming a beneficiary avoids probate, but because she OWNED the policy the proceeds are still in her gross estateCorrect. Probate avoidance and estate tax inclusion are separate questions, and ownership drives the latter.
2. B.Yes, but only the cash surrender value immediately before death is included, not the full death benefitWhen the insured owned the policy, the full death benefit is included, not the cash value.
3. C.No; the proceeds are excluded because they are income tax free to the sonIncome tax free receipt under Section 101(a) has no bearing on estate tax inclusion. They are different taxes.
4. D.No; proceeds paid directly to a named beneficiary are excluded from the gross estateDirect payment avoids probate only. Ownership at death brings the proceeds into the gross estate.

Why: Yes, and the two ideas are independent. Naming a living beneficiary means the proceeds pass by contract and avoid PROBATE, which is the court supervised process of retitling assets under a will. That saves time, expense and publicity. It says nothing about the federal ESTATE TAX, which reaches everything the decedent owned or held incidents of ownership over at death, including a policy on her own life. Marguerite owned the policy, so the full 900,000 dollars is in her gross estate even though not a dollar of it went through probate.

Ingrid Solvang named her brother as the sole beneficiary of her traditional IRA when she opened it. Five years later she signed a will leaving "all of my retirement assets" to her daughter. Ingrid dies with the original beneficiary form still on file at the custodian. Who receives the IRA?

1. A.Her brother, because the beneficiary designation on file controls and the IRA passes outside the probate estateCorrect. The custodial beneficiary form is a contract that bypasses the will and probate.
2. B.Her estate, because the conflict voids the beneficiary designation and forces the IRA through probateThe designation is not voided by an inconsistent will, so the IRA never enters probate.
3. C.Her daughter, because the will is the later document and expressly covers retirement assetsA will cannot override a valid beneficiary designation on a retirement account.
4. D.Her brother and daughter equally, since the two documents conflictThere is no default splitting rule; the beneficiary form governs outright.

Why: A valid beneficiary designation on file with the IRA custodian is a contract with the custodian. The account passes directly to the named beneficiary outside the probate estate, so the will does not redirect it no matter how recently it was signed. The lesson for representatives is to have customers review beneficiary forms after every major life event, because the will cannot fix a stale designation.