Uncle's conflicting instructions create confusion

Legal issues

Dear Jonathan: My uncle recently died and I was named as the executor of his estate. His will states that all of the proceeds of his life insurance policies are to be divided equally among his nieces and nephews – my cousins. However, all of his life insurance policies name me as the sole beneficiary. What does this mean? Does the will override the beneficiary designation? If not, am I morally obligated to share these proceeds?

Jonathan says: When there is a conflict between what a will states and who is named as the beneficiary on a life insurance policy, the beneficiary named on the life insurance policy typically controls. In other words, since you were named as the beneficiary on your uncle’s life insurance policies and since you survived your uncle, those life insurance proceeds are legally yours regardless of what the will states. If your uncle wanted his will to control the disposition of those life insurance proceeds, then he should have named his estate as the beneficiary and not you.

Having said the above, even though those life insurance proceeds are legally yours, you will have to decide whether you are going to keep them for yourself or whether you are going to share them with your cousins. Do you know what your uncle’s intent was, i.e., did he intend for you to be the sole beneficiary of those proceeds to the exclusion of the other nieces and nephews, or did he want you to share those proceeds with them? Is it possible that he had named you as the beneficiary before preparing his last will and testament and by naming all of his nieces and nephews as the beneficiaries in that will, he thought that superseded the beneficiary designations on the life insurance policies?

Whether you have a moral obligation to share those insurance proceeds or not depends on whether you are able to discern your uncle’s intent. Even if it is clear to you that your uncle intended for you to have those life insurance proceeds, by virtue of the conflicting provision in his last will and testament, he has put you in a very awkward position.

If you come to the conclusion that your uncle’s intent was for you to share the proceeds or even if there is no evidence that was his intent, but you intend on sharing the proceeds anyway, then you need to understand the consequences of doing so. Depending upon how many nieces and nephews there are and the total amount of the insurance proceeds you intend on sharing, upon dividing the same, you might be making a taxable gift to each of your cousins, which would require the filing of a gift tax return. This is because you now legally own those proceeds, and if you choose to share any of those proceeds with your cousins, you will be deemed to have made a gift to each of them. If any particular cousin’s individual share is in excess of $14,000, which is the current amount of the annual gift tax exclusion, i.e., the gift amount you can make tax-free, then that excess amount will be deemed to be a taxable gift requiring the filing of a gift tax return.

In addition to the above, if you earn any interest on those life insurance proceeds prior to making any such gifts to your cousins, that earned interest will need to be reported on your own tax return for that tax year.

Before making any gifts to your cousins, you should take into account both the costs incurred by you in making those gifts, as well as any earned interest which will end up being reported on your tax return.

I suggest that you consult with an estate planning attorney in your area who can review all of this with you and who can advise you as to how best to proceed.

Good luck.

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, P.C. in Grand Rapids, Mich.

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