PRACTICAL VIEW : Third Parties Have Some Hidden Rights

You may have certain legal rights that you didn’t know about, all because of something someone else has done.

The subject today is third-party beneficiary contracts: that is, a benefit that you receive from a contractual obligation entered into between two other people.

These can come in all shapes and sizes. Let’s take a common one. You have an insurance policy on your life, so you name a person as the beneficiary. This is a contract between you and the insurance company, with the company agreeing to pay a certain sum to a named individual upon your death.

Now, examine this situation from the perspective of the named beneficiary. That person may not even know that he or she is the prospective recipient of your largess. You don’t have to notify the beneficiary or get approval to name the person or change your selection. In fact, the person entitled to the proceeds may not know anything about it until notified, after the death, of the benefit.

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Even though a third-party beneficiary may not know about his situation, that person does have legal rights. Let’s take a contractual example.

Say Bob owes you $700. Sally wants Bob to paint her house, and Bob agrees to do it, provided that Sally pays you the $700 that Bob owes you. (That’s what Bob was going to charge anyway.) In this case, you are the third-party beneficiary of the contract between Sally and Bob.

Sally and Bob are not required by law to tell you about the agreement, but the chances are that they will. More significant, Sally and Bob can’t amend their agreement and change its impact on you without your consent. You have legal rights as a third-party beneficiary. You can, in fact, successfully sue Sally if she does not pay you the $700 even though you did not have a contract with her.

Bob and Sally could change their agreement without telling you if in their original contract they had specifically stated that the contract could be amended without your consent.

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There are other kinds of legal documents that have similar hidden rights for people who may now know about them.

A will works in this way. A testator (that’s legalese for the person who makes or signs the will) names a beneficiary who may not know he is named in the will until the testator dies and the will is admitted to probate.

Once the will is admitted to probate, there are procedures that require notification of all the people who inherit under the will, including the publication in a newspaper of such information.

A living trust can work like a will in that proceeds are payable after death.

The designated trustee takes over the operation of the trust and follows instructions in terms of giving grants to named beneficiaries. There is not direct probate court supervision of the process when a living trust is involved, so if you think you are due something, by all means speak up to the trustee.

Another unusual hidden right in wills is called a Power of Appointment. For example, Aunt Jessie may in her will say that you have the power to determine which charity will receive a specific bequest. She does not need your consent to give you that power, and you may not know about it until the will is admitted to probate.

These are all legal rights you may have today and not even know about it.