A recent decision of the U.S. Supreme Court, Egelhoff v. Egelhoff, brings to the forefront not only the importance of creating a proper estate plan but also of periodically reviewing that plan once it is created. There is a tremendous amount of misunderstanding as to how assets pass to our beneficiaries at time of death.

I’ve met a number of individuals who believe that if they don’t have a Will, their assets will simply go to the state of New Jersey. While that probably isn’t true, relying on the intestacy statutes for your estate plan is inadvisable. Most people would want their assets to pass to their beneficiaries in a manner that is not provided for in those statutes.

But having a Will doesn’t necessarily mean that your estate plan is complete. For one thing, a Will doesn’t affect many forms of property.

Few people understand how property passes at time of death. A Will only directs how certain property, called “probate property,” passes at time of death. Property can also pass “by operation of law” and “by contract,” these forms of ownership are called “non-probate property.” In fact, some of the more valuable assets in a person’s estate could pass by means other than their Will.

For example, if you are married and own a house, the title to the house is probably drafted so as to create a joint tenancy with rights of survivorship. If one spouse were to die, the other would own the house outright, “by operation of law.” The deed wouldn’t have to be changed in order for this to take place.

An example of property passing “by contract” is a beneficiary designation on a 401(k) plan. The plan, a contract between employer and employee, names an individual to whom the plan proceeds will pass when the employee dies. The employee may say in his Will something to the effect of “all of my property is to go to my spouse,” but if he began working when he was unmarried, naming his parents as beneficiaries of his 401(k), and neglected to change the beneficiary designation, his parents will take the proceeds of his 401(k) plan when he dies, not his wife. The contract, the 401(k) plan with a beneficiary designation, controls, not the Will.

In the Egelhoff case, the Supreme Court addressed just this issue. David Egelhoff divorced Donna Egelhoff two months before his death, which resulted from an automobile accident. At the time of his death, Mr. Egelhoff had failed to change the beneficiary designation on his 401(k) plan (the “plan”); Mr. Egelhoff named Donna Egelhoff as his beneficiary.

The Egelhoffs lived in Washington State. A Washington statute provided that following a divorce, non-probate assets, such as the plan, would pass to a decedent’s heirs as if the former spouse had predeceased the decedent.

Mr. Egelhoff’s children from a previous marriage, his heirs, sued Donna Egelhoff in Washington State court to recover the benefits paid to her under the terms of the plan. They argued that pursuant to the terms of the Washington statute, the beneficiary designation in the plan was void and that they should take from Mr. Egelhoff’s estate as his natural heirs.

At the trial level, the children lost, the trial court held that ERISA (the Employee Retirement Income Security Act of 1974, a federal law that governs employer-employee plans such as the one at issue in the Egelhoff case) pre-empted the state statute. The Washington appellate courts reversed the trial court, but the U.S. Supreme Court reversed again and upheld the judgement of the trial court.

According to the Supreme Court, ERISA pre-empted the Washington statute because the statute had an impermissible connection with ERISA. In short, the Court held that ERISA designated who the recipient of the plan benefits was; plan administrators should be able to rely on a plan’s beneficiary designation and should not have to turn to state law to determine the true beneficiary of a plan’s benefits.

Donna Egelhoff, therefore, will receive the benefits of Mr. Egelhoff’s plan, not his children. The Egelhoff case reinforces the importance of proper estate planning and proper monitoring of an estate plan once it is put in place. A Will is only one instrument in an estate plan. There is jointly held property and beneficiary designations to consider, as well.