When the RMS Titanic sank into the icy waters of the North Atlantic, one of the lesser-known problems it raised was how to handle the estates of married couples who refused to part as the ship went down. Several women chose to remain with their husbands on board the ship instead of getting into a lifeboat, and many of these couples had left everything to each other in their wills. This left it up to the courts to untangle some thorny estate-planning issues -- namely, which spouse died first.
What happens if your primary or contingent beneficiary dies immediately before you do, or at the same time that you do? There are several things you can do to ensure that your estate is handled properly in the event that happens to your intended beneficiaries.
The simultaneous-death clause
The simultaneous-death clause is designed for two people who are leaving some or all of their assets to each other -- which makes it popular among married couples, particularly those whose estates measure in the millions. If both members of the couple die at once, or if it's impossible to determine which of them died first, then this clause will kick in and name one of them as the first to die. This clause can be extremely important when it comes to estate planning, as it can ensure the orderly dispersion of the assets of the one deemed to have died first, and it may also reduce or even eliminate estate taxes.
For example, consider a married couple in which the wife has $10 million in assets to her name, while the husband has $3 million. Then both of them die simultaneously in a car crash. The wife's estate plan calls for the amount equal to her estate tax exemption ($5.49 million in 2017) to be dispersed to her children, with the remaining $4.51 million going to her husband. The husband's estate plan leaves everything to her.
If the husband had survived, then the unlimited marital transfer would apply, and his gross estate would then be worth $7.51 million ($4.51 million + $3 million), $5.49 million of which would be exempt from estate taxes. However, because the order of death cannot be determined, neither estate can pass to the other, and the probate court (which is expensive and time-consuming in and of itself) will now have greater difficulty in processing the two estates. This means the remaining $4.51 million of the wife's estate cannot pass to the husband's estate before it is dispersed to the children, and thus it will be entirely subject to estate taxes. The wife cannot use any of her husband's unused exemption. (Note: If either spouse left assets to someone other than the spouse who died -- such as a life insurance policy, IRA or qualified plan -- then these assets would still go directly to the beneficiary without going through probate.)
So how can you avoid this sort of tragic scenario? In this case, the simultaneous-death clause could dictate that the wife is deemed to have died first so that her estate will be transferred to her husband's estate before it is dispersed, thereby dramatically reducing the amount of estate tax that is paid.
Couples who don't have this clause in their wills or other legal documents and die simultaneously may be subject to the Uniform Simultaneous Death Act. This law stipulates that when two people who are leaving any amount of assets to each other die within a certain period of time -- in some states, the time limit is 120 hours, while in others it's as long as 120 days -- then it is legally deemed that both members of the couple have predeceased each other.
Deferrals of survivorship
Many estate-planning experts recommend that you insert another type of clause in your estate planning that requires your beneficiaries to survive you for a minimum period of time before they can receive your assets, such as six months. This provision can effectively prevent your assets from going through probate court more than once in a relatively short time and possibly having estate taxes assessed twice if your estate is large enough.
The last line of defense
A final clause that many estate planners recommend is known as the "Armageddon" or "Titanic" clause. Also known as an "all dead" clause, this provision essentially functions as a catch-all in the unlikely but possible event that all of your primary and contingent beneficiaries die before receiving your assets. Under the Titanic clause, you will name a final beneficiary to receive all of your assets in the event that none of your previous beneficiaries lives to collect them. Most people name a qualified charitable organization or another institution, as the death of any single person cannot prevent an institution from receiving their assets.
The Titanic clause is fundamentally unlike the simultaneous-death clause because it covers all of your beneficiaries instead of just your primary ones. If you have your entire extended family listed as primary and contingent beneficiaries and (God forbid) you all perish at once, then the "Titanic" beneficiary would still be there to receive your assets and disperse them according to your wishes.
Having a well-crafted estate plan will generally require you to incorporate one or more of these clauses into your will or other legal documents. For more information on the Titanic clause and how it can benefit you, consult your financial or estate planner.