Beneficiary Designations to Avoid Probate
Beneficiary Designations to Avoid Probate can be a Great Estate Planning Tool When Properly Used. But Use Caution to Avoid Common Pitfalls.
You may have heard that you can avoid probate upon your death by simply placing beneficiary designations on your assets. Beneficiary designations, sometimes referred to as Pay on Death or POD designations, can be a great estate planning tool when properly used. Individuals who are named as beneficiaries on your various bank and investment accounts, insurance policies, retirement plans and so forth, can receive their share of the asset or plan upon your death directly from the institution or company involved, without the asset or funds being included as part of your probate estate. Depending upon the nature of your assets, sometimes probate can be avoided entirely with properly designated beneficiaries. However, be sure to use caution to avoid some very common pitfalls. As an Estate Planning and Probate Attorney I’ve seen various unexpected results with beneficiary designations, including the following:
Disinheriting Children or Grandchildren
If you want all of your children to receive an equal share of a particular asset, plan or policy, they must be properly designated as a class. I’ve seen many clients name certain children as the beneficiaries of a particular set of assets, and their other children as the beneficiaries of other assets. But as the client gets older his or her circumstances and assets can change significantly, causing unintentional and inequitable results in the disposition of those assets. Special consideration must also be given to address stepchildren and other blended family situations, as well as unborn children or grandchildren. Furthermore, care must be taken to properly address what happens to the share of a child who predeceases you; should that share pass equally to the deceased child’s children, or equally among your surviving children? Not all companies and institutions allow customized beneficiary designations to address these issues. Be sure to consult with a qualified Estate Planning Attorney to ensure that you fully understand your options, and the proper way to complete your beneficiary designations for the desired results.
Creating the need for a Guardianship
Leaving assets or proceeds directly to a minor beneficiary will often require the need for a court appointed guardian. A legal guardian is appointed by the court to safeguard and manage the asset until the beneficiary attains the age of majority, which is 18-years-old in Wisconsin and Minnesota. Guardianship proceedings can be costly and burdensome, and they can be avoided with proper estate planning.
Distribution to Irresponsible Beneficiaries and Diversion of Assets
Not all beneficiaries are responsible enough to use inherited assets for the purposes for which they were intended. And once assets have been released to a beneficiary, they are vulnerable to attachment by the beneficiary’s creditors, judgments, or other third parties, which can cause the assets to be diverted to someone other than the beneficiary. To help avoid these issues, many clients chose the flexibility of a Living Revocable Trust, which can help protect the assets for the ultimate beneficiaries upon your death, and provide specific terms as to the administration and distribution of the assets.
Jeopardizing Public Benefits
Leaving assets directly to a beneficiary who may be disabled, or who may become disabled or have special needs in the future, can affect their eligibility for certain public benefits, including Social Security Supplemental Security Income (SSI) and Medicaid coverage. Designating those assets to pass to a properly drafted supplemental needs trust can avoid this problem.
Inadequate Estate Planning
Beneficiary designations should never be used as a complete substitute for a good estate plan. Not all assets can be addressed by a beneficiary designation. For example, automobiles, collectables and other tangible personal property are all part of a person’s estate, and cannot be disposed of by beneficiary designation. There are also claims that can arise after your death which cause additional assets to become part of your estate, such as damages paid in connection with an automobile accident, medical malpractice, or class action lawsuit. It’s very important that you have a Will or Trust in place to address the management and disposition of these assets.
Misunderstanding Your Estate Plan
On several occasions I’ve met new clients who have informed me that it doesn’t matter how their beneficiary designations are set up because they have a Last Will & Testament that passes everything equally to their children. The client had been informed that designating one of his or her children as the beneficiary of their various assets would avoid probate, and they assume that their Will would then dictate how the assets would be distributed. But this is not correct. Generally the child named as the beneficiary has no obligation to share with other children or heirs who may have been named in the person’s Will. [However, even with a beneficiary designation, in some cases an asset may still be subject to the legal claim of a surviving spouse of the decedent, a claim by the decedent’s estate for apportionment of estate taxes, or to recovery by certain government entities that have paid public benefits to the owner of the asset during his or her lifetime.] It’s very important to understand the functions of your beneficiary designations and your Will or other estate planning documents.
Unexpected Tax Consequences
In some cases making the wrong beneficiary designation can have unexpected income tax, inheritance tax or estate tax consequences. This is a topic that is quite complex and it deserves its own blog post, but I encourage people to consult with their attorney and tax advisor to address all potential tax issues and concerns.
Dropped Designations
We’ve all become accustomed to the fact that the business world is constantly changing. Companies merge, banks buy other banks, insurance companies change hands. In the course of my estate planning and probate practice, I’ve experienced situations when a representative of a company has advised a beneficiary that they have no record of the decedent having named a beneficiary on the account, policy, or plan in question, and that the proceeds must be paid to the decedent’s estate. In some cases, despite us providing documentation evidencing the beneficiary designation, the company has refused to honor it since it was not reflected in their records. A properly drafted and executed Will is necessary to ensure that these proceeds pass as the decedent intended.
The issues addressed above are just a few of the problems that can result in the absence of proper planning. Estate planning need not be complex in every case. Often times beneficiary designations can be combined with a simple will or living trust to ensure that all of the bases are covered. Estate planning should involve careful consideration of an individual’s goals and their particular circumstances. It cannot be a one size fits all approach. Contact Attorney Stephen Kosa today to address your questions about beneficiary designations and estate planning.