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EVERYTHING I KNOW about managing money I learned in court. As part of my legal practice, I represent people involved in disputes over money or property. These can include claims against financial advisors for alleged misconduct, contested wills and trust disputes, and family members at odds over a family business.
These disputes can teach us important personal finance lessons. Here are four lessons—learned the hard way—from four cases my firm handled. All are based on an actual case, though names and details are changed to protect the litigants’ privacy.
Case No. 1: Life insurance goes to the ex-spouse. Jane and John’s divorce was bitter. Even after their divorce was final, Jane had to go back to court asking that John be held in contempt for failing to pay child support. Imagine, then, Jane’s surprise when 15 years later she received a letter from a life insurance company expressing its condolences on John’s death—and enclosing the forms necessary to claim his $1 million policy.
Jane was listed as the beneficiary of John’s life insurance policy, which the insurance company was obligated to follow under state law. John’s widow promptly sued to try to prevent Jane from getting the payment. Still, the court awarded the $1 million policy proceeds to Jane, along with a small bank account, for which Jane was also listed as a joint owner at John’s death.
Lesson learned: If you’re contemplating divorce, identify all financial assets which have a survivorship or beneficiary designation. These can include life insurance, and bank, brokerage, and retirement accounts. Discuss with your divorce attorney how they should be addressed.
In some states, a divorce automatically prevents an ex-spouse from being the beneficiary of a life insurance policy or receiving the financial accounts of an ex-spouse. In others states, however, the divorce decree must specifically disclaim all future rights. If it doesn’t, the law treats written beneficiary directives that are in effect at death as the deceased’s final wishes for where assets should go—even if it’s to the ex-spouse.
Case No. 2: A widow is sold unsuitable annuities and life insurance. Robert, a very successful businessman, was married to Rachel, a stay-at-home mom. They had three children under age 10. Sadly, Robert died in an auto accident.
Robert left Rachel substantial assets: a home worth more than $1.5 million, life insurance proceeds of $5 million, and stocks worth more than $2 million. Rachel was devastated and sought the help of a friend, Charles, an insurance agent.
Charles quickly got to work to protect Rachel and her children’s future, or so she thought. Within eight months, substantially all of the stocks had been sold and the proceeds placed in 10 different variable index annuities, some with surrender charges lasting as long as 10 years. Charles also sold Rachel whole-life insurance with a total death benefit of over $8 million—and premiums of almost $135,000 annually.
To pay the premiums, Charles sold Rachel a couple of single premium immediate annuities. The premiums on these totaled $1.5 million, and they generated an annual income of $175,000.
After a few years, Rachel had difficulty paying her bills because the initial premiums for the annuities and annual life insurance Charles sold her consumed most of her liquid assets. Charles, on the other hand, profited handsomely from this “financial plan.” He received more than $550,000 in commissions on the annuity sales alone. He earned another $175,000 in commissions on the whole-life insurance sales. He also charged a 3% annual fee on the total value of the annuities and insurance policies that he “managed” for Rachel. In the first three years after Robert’s death, Charles pocketed almost $1.5 million in commissions and fees.
Fortunately, Rachel consulted a registered investment advisor who put her finances on a less costly and stable path by slowly unwinding her annuity purchases. Sadly, as part of the new plan, Rachel had to sell the home in which the children had grown up.
Rachel sued Charles, who settled before trial for a substantial amount. As is often the case, Charles had spent most of his commissions and fees, and so will be paying Rachel back for decades. Even so, Rachel will never be as well off as she could have been but for Charles’s misconduct.
Lesson learned: People who come into a substantial sum are often the target of unscrupulous brokers, financial advisors, and insurance agents. They’re often sold insurance products with large initial premiums or risky investments requiring a big initial payment.
It’s wise for those with newfound wealth to take their time and evaluate a variety of options. They should also make sure that any advisor has the skill and knowledge needed to give competent advice. If you consult with an insurance agent about investing, you’re almost certain to be sold insurance products—whether they’re suitable or not.
After litigating these cases for more than 30 years, my preference is to seek advice from a registered investment advisor. By law, an RIA is required to act as a fiduciary, providing advice that’s solely in a client’s best interests, and not influenced by the size of the fees or commissions the advisor might earn.
Case No. 3: A brother and sister fall out over the family business. Hobart started a small manufacturing business in the 1940s. By 2015, it had grown into a multi-million-dollar company. Henry and Harriet were Hobart’s only children, and each had grown up working in the business. Henry was groomed to be the president, while Harriett’s role was mostly part-time, doing various administrative and bookkeeping tasks while she also raised two children.
When Hobart died, he left the business in equal 50-50 shares to Henry and Harriet. One day, when Harriet came to work, her keys to the office didn’t work. There was a sign on the door that she had been terminated and would be charged with trespassing if she didn’t leave the property.
Henry not only terminated Harriet’s salary, but also refused to distribute to Harriet her 50% share of company profits. He claimed that all profits needed to be retained for upcoming company expenses.
Harriet sued Henry, asking the court to appoint a receiver to take over the company, sell it, and distribute the net proceeds equally to her and Henry. This nuclear option was extremely distasteful to Harriet, as she did not want to harm the business her father had spent years building.
She had no choice, however, because Henry had wrongly kicked her out of the business and was not distributing her share of the profits. Before trial, Henry and Harriet reached a settlement under which Henry bought Harriet’s interest in the company and he became its sole owner.
Lesson learned: When a business is left in equal shares to a founder’s children, resentment can arise over control, especially when they have different levels of responsibility. As equal owners, though, each sibling is entitled to an equal share of the profits, just as those who own Coca-Cola stock are entitled to a dividend, even though they don’t work for Coca-Cola.
Henry and Harriet’s dispute was further complicated because there were no corporate governance documents. Written by-laws, shareholders’ agreements, and operating agreements can help resolve disputes between owners. For example, a shareholders’ agreement could have provided the procedure and formula to follow when shareholders need or desire to exit the business.
Family business owners can ask an experienced corporate attorney to prepare documents to avoid the type of costly litigation that eventually separated Henry and Harriet. Well-drafted corporate documents, for example, might have provided for a third-party tie-breaker vote if there was a 50-50 deadlock between Harriet and Henry that could threaten the company’s continuing existence if it was left unresolved.
Case No. 4: Do-it-yourself legal documents can fail. Mary and Moses were each divorced, and each had children from their prior marriage. Before they married, they wisely thought a prenuptial agreement was in order. Unwisely, they found one on the internet, printed it out, filled in a few blanks and signed it. They were married a few weeks later.
About a year later, Moses died unexpectedly. At his death, his sons from his prior marriage were listed as the beneficiaries of his substantial 401(k) account, as well as several other financial assets worth more than $2 million. The prenup stated that Moses and Mary would each name the other as beneficiaries of all such accounts, so Mary believed that she was entitled to that money.
The prenup was unenforceable, however, because it didn’t have the required number of witness signatures according to their state’s law. Because the prenup was unenforceable, Mary could not claim that Moses’s estate was required to pay her, from other assets, the amount she would have received if Moses had named her beneficiary. All the accounts that Mary thought were to be hers after Moses’ passing went to his sons, with whom she already had a tense relationship.
Mary and the stepsons resolved their dispute in a confidential settlement, under which Mary received some of the money that would have come to her under a properly drafted and executed prenup.
Lesson learned: Hiring an attorney can be expensive. But many times, the cost of untangling the mess that lay people create by playing lawyer is many times more costly. In this case, an unenforceable prenup drastically changed Mary’s expectation of the money she would have as Moses’s widow.
A client gave me a coffee mug that says, “Don’t Confuse Your Google Search With My Law Degree.” Important financial and business documents should be drawn up by a competent attorney.
For example, wills that don’t meet legal formalities might mean that the folks involved are treated as if they died without a will, and their assets will be distributed as directed by state law, which may not be as they had desired. A do-it-yourself business document, such as a shareholders’ agreement, a buy-sell agreement, a partnership agreement or an employment contract, might be ambiguous or omit common terms and conditions that can lead to a result very different than what the parties intended.
Poorly drafted documents like these can be so ambiguous that expensive litigation is necessary to sort out what was intended. Or they may have defects that prevent their enforcement. Attorneys often say “pay me now or pay me much more later.”
Robert C. Port is a partner with the Atlanta law firm of Gaslowitz Frankel LLC. He is fascinated with understanding how people deal with and manage money, especially the emerging field of behavioral finance. When not in a courtroom or before an arbitration panel, he prefers to be cycling, skiing, hiking, or swimming. Check out Robert’s previous articles.
This article is for informational purposes only, and should not be relied upon as—and does not constitute—legal advice. You should not act upon any information in this article without first seeking legal counsel from someone licensed to deliver advice in the relevant jurisdiction, and who understands your particular facts and circumstances.
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There are plenty of very reliable sites the allow someone quickly to create basic wills and other legal documents. The good ones hand hold step-by-step and make it clear what signatures and notarizations are required to make it legal in that particular state.
Thanks for taking the time to comment. Yes, there are websites where you can create your own will and other basic legal documents. They can be perfectly fine for garden variety planning and some business matters. But if you have any meaningful assets, or a complicated family or business situation, the “do it yourself” option can be risky.
I understand that folks don’t want to pay legal fees, but rest assured that the cost of addressing some of the messes created by folks playing lawyer run many, many multiples of the costs of hiring a competent attorney to do it right the first time.
Great summary of some bad things that can happen if you don’t plan well.
My brother was in the hospital in a coma. He had a living will but we couldn’t find it. Later he woke up and we discovered the wording “no heroic measures” in his living will and asked him if that’s what he really wanted. He said, “Hell no!” I also reviewed his regular will with him and he wanted to make a lot of changes including taking his ex-wife off. We did and he died two weeks later. Not many people get the chance to make changes that late in the game.
Number 2 above really grates me. To take advantage of someone going through grief is incomprehensible to me.
Equal partnerships are like marriages. A lot of them don’t work out. Going in you need a plan (like a solid prenup) if things don’t work out.
Note to Jonathan: I first accessed this page with Microsoft Edge and the commenting was “closed.” Then I tried Google Chrome and was able to post. Just an FYI.
I asked HD’s web developer to look into the commenting “closed” issue, and he may have addressed the problem. But let me know if you have trouble again.
Excellent article. I was involved in settlement of 2 different estates in the last few years and in both cases there were highly contentious issues because wills had been poorly written or not updated, etc. My experience with lawyers has been that some are much better than others and that you get what you pay for.
I agree that some lawyers are better than others – just like in every profession.
Well, with respect to case #4, not sure what happened there.
You stated:
“… At his death, his sons from his prior marriage were listed as the beneficiaries of his substantial 401(k) account, as well as several other financial assets worth more than $2 million. The prenup stated that Moses and Mary would each name the other as beneficiaries of all such accounts, so Mary believed that she was entitled to that money. …”
Once the worker remarried, a designation of the sons for the 401k plan should no longer apply, unless the new spouse waived her rights.
Any change in the ERISA marital survivor beneficiary designation requires spousal consent. ERISA permits a participant to change the default designation of a spouse as the beneficiary. However, that only becomes effective where the spouse consents in writing. ERISA 205(c).
Thanks for your comments. I am aware of the waiver/consent issue regarding accounts covered by ERISA, but the opposing counsel, the attorney for the surviving spouse, never made any claims or arguments on whether ERISA affected her client’s entitlement to the 401(k) account. If the other side’s attorney is clueless, I have no duty to educate them. Yet another lesson to learn – chose the right attorney for the job.
Actually, many, perhaps most plan documents are (should be) written so that prior survivor designations (in plans where the individual is an active, term-vested or retired participant) are automatically voided when the individual (re)marries. Similarly, many plans have provisions that automatically void the designation of an ex-spouse upon divorce. In those situations, where there is no valid beneficiary designation on file, the plan will often have an order of use.
Oftentimes, because of plan provisions, it makes no difference whether the participant notifies the employer – because the plan document says spouse unless there is consent.
Most times, the employer knows about the spouse with regard to enrollment in various benefit plans – medical, life, dental, etc. due to change in status processing under the cafeteria plan.
Some failures/conflicts have ended up in front of the US Supreme Court. For an assessment of the challenge of beneficiary designations in ERISA plans versus inconsistent designations in wills, etc., see:
chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2012-current-challenges-and-best-practices-concerning-beneficiary-designations-in-retirement-and-life-insurance-plans.pdf
Thanks for your comments. I am aware of the waiver/consent issue regarding accounts covered by ERISA, but the opposing counsel, the attorney for the surviving spouse, never made any claims or arguments on whether ERISA affected her client’s entitlement to the 401(k) account. If the other side’s attorney is clueless, I have no duty to educate them. Yet another lesson to learn – chose the right attorney for the job.
But what if the employee had the 401(k) before he or she got married? I don’t believe there’s any requirement that the beneficiary designation be changed to the new spouse.
I think the new spouse would only be entitled to any contributions (plus their growth) that the employee made in his 401(k) after they were married. Premarital assets, including 401(k)s, are considered separate property.
It seems to me ERISA law would supersede the prenup for the proper 401(k) asset distributions beneficiary requirements.
The DOL has a FAQ that states –
“In most 401(k) plans and other defined contribution plans, the plan is written so different protections apply for surviving spouses. In general, in most defined contribution plans, if you should die before you receive your benefits, your surviving spouse will automatically receive them. If you wish to select a different beneficiary, your spouse must consent by signing a waiver, witnessed by a notary or plan
representative.
If you were single when you enrolled in the plan and subsequently married, it is important that you notify
your employer and/or plan administrator and change your status under the plan. If you do not have a spouse, it is important to name a beneficiary
https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/retirement-plans-and-erisa-for-workers.pdf
FAQs answers are not law but it appears the relevant provisions to this layman are found in 29 U.S. Code § 1055 – Requirement of joint and survivor annuity and preretirement survivor annuity which seem to specify a one year requirement after change of marital status but…. an expert seems to be needed.
Mr. Port’s comments about seeking competent legal advise would seem to me to be spot on.
Thanks for your comments. I am aware of the waiver/consent issue regarding accounts covered by ERISA, but the opposing counsel, the attorney for the surviving spouse, never made any claims or arguments on whether ERISA affected her client’s entitlement to the 401(k) account. If the other side’s attorney is clueless, I have no duty to educate them. As you point out, yet another lesson to learn – chose the right attorney for the job.
Case No. 4: Do-it-yourself legal documents can fail.
Documents written by paid attorneys can also fail
Yes, documents written by lawyers can also fail. We are not infallible. But if the attorney fails to meet required professional competence, you might have a malpractice claim to recover any actual damages. If you screw up a legal matter on your own, you have no recourse.
The advice isn’t just to utilize a random lawyer, but a lawyer who knows what they’re doing. Picking a lawyer (or doctor, investment advisor, etc.) without care might not be any better than doing it yourself.
Agreed. The example of not knowing about the need for witnesses is also weak. All of the major online legal document services clearly state the need for witnesses.
The example may be “weak,” but that is actually what happened. Don’t assume people follow the directions given on how to fill out the documents or any requirements as to witnesses or notaries.
Thank you, Robert, for sharing these excellent examples.
Thanks for reading and taking the time to comment.
These are some amazing stories and I enjoyed reading them. Case #2 happens way too often with unscrupulous advisors and annuity pushers. My parents were paying 3.55% in commissions.
I always enjoy the varied perspectives on this site. As a CPA I find there are no absolutes, yet most issues such as these were start from someone taking action based on an absolute.
After my husband died unexpectedly from heart failure many years ago, I found a Will that he had prepared and printed from a online site, leaving everything to me. It had not been signed and witnessed. We were young and poor with no investments, no children, and owned only a Chevrolet pickup. I changed ownership of his truck to me and sold it with no problem. Nothing more was necessary. I will never know why he prepared the Will without mentioning it to me.
I suppose when you’re young you think “yeah I’ll get around to talking to my spouse about my will and any estate plans” but many folks just don’t prioritize it. And, sadly, many other survivors may believe estate plan documents exist but have no idea where they are or how to access them.
A wise man once told me that answers are easy but questions are hard. A good lawyer will ask the relevant questions to make sure whatever legal document you need has covered all the bases. It is not obvious to us lay people what all the questions are.
Thanks for advocating folks seek competent legal advice!
Every five or so years my wife and I meet with our estate planning attorney. I say, “I’m dead. Let’s go through how all this works for my wife.” Odds are she will outlast me and it just nice to know things are in order for her.
Good example of why many people procrastinate. They are confronted with all the possibilities and freeze.
I know people who are superstitious about life insurance and don’t buy any. I like to tell them if they buy a policy they will have an insurance office full of people somewhere rooting for them to live a long time. It usually doesn’t convince them but it’s a talking point.
Very interesting and informative, thank you.
While working in employee benefits I had to deal with similar situations regarding life insurance and survivor benefits under a pension plan.
My favorite story was the employee who died and left his group life insurance to Mary, spouse. Problem was he had two families in different states and both wives were Mary.
Thanks for taking the time to read the article and comment. Your story about the 2 “Marys” is amazing. Do you know how it was resolved? I’m presuming that the insurance company paid the money into court (what is called an interpleader lawsuit) and let the Mary’s fight it out between themselves.
Do online document creation sites like RocketLawyer provide a sufficiently legal document for something like a living will or last will and testament, or would you consider that to also fall under the category of Google search and playing lawyer?
These sites say they can create proper and enforceable documents, and I have no reason to think otherwise. The question is whether the documents can be properly tailored to your situation and in the end, accomplish what you intended. By the time they are used – when you are in a coma in a hospital, or after you have died – it is too late to learn that they are ineffective, or don’t accomplish what you intended. In my view, if you have meaningful assets, complicated assets (such as real estate or a privately held business), blended families due to a prior spouse’s death or divorce, etc., paying an attorney to get it right makes sense.
Plus, many states have very precise rules about how a will is executed, such as requirements that the person in some way declare, in front of the witnesses, that this is their will, that all witnesses actually see the person sign the will (meaning as a practical matter that everyone needs to stay in the room the whole time), etc. If someone is unhappy with the will’s disposition of property after death, screwing up on these “technical” requirements can lead to a claim to set the will aside.
Thanks for these illustrative stories. Great advice!
Thanks for taking the time to read the article and comment!
When COVID hit, my wife felt an extra need to get wills drawn for the two of us (at the time I was 60 and she was 64). We got Suzy Orman forms and filled them out. Had trouble getting them notarized because of the pandemic but finally did. Fast forward to February 2022 and my wife passed (not COVID). I went to county clerks office to file her will. Later found out that she had already done so, I also found out that we didn’t need to and them lastly found out the will was invalid since it left everything to a trust that didn’t exist. Then had to spend $5k for lawyer to assign me as executor (probate), state law didn’t grant me what the will intended, and I have to wait 7 months to see if any claims are made against the estate.
In the end (haven’t gotten there yet), her daughters will receive more than they would have which is fine because I know my wife was going to sell the house to one of them below market value and I choose to honor that intent.
Sorry to hear you had this experience. Sadly, it confirms some fo the points was was hoping to make in the article.
I’m sorry to hear about your wife. Hassling with the estate is the last you thing you would want to do after losing her. Thank you for sharing your story. Hopefully it will inspire others to get things squared away properly.