Beneficiary Designations and Payable on Death, Estate Planning Pitfalls

Wills and Trusts can Be Ineffective If Designations are Ignored

People, including attorneys, often fail to realize that beneficiary designations are controlled by what a Will or Trust says. The case of Wiley is an excellent example. He had a plan that his kids should share equally. However, he designated one of his sons to receive the money in his bank when he died. The son shared with some of the siblings but excluded the stepbrother. Read More

Estate Planning is More than Generating Documents. It is crucial to insure that Beneficiary Designations Work with the Estate Plan.

Many types of assets are designed or may be owned with a Beneficiary or Payable on Death Designation. These assets are transferred to the person, trust or organization after proof of your death.

Terms:

Primary Beneficiary: The person, trust, or organization who will receive the asset if they survive you.

Secondary or Contingent Beneficiary: The person, trust, or organization who receive the asset if you are not survived by the primary beneficiary.

Estate as Beneficiary: Failure to name or all beneficiaries predecease you.

Payable on Death or Transfer on Death: The named beneficiaries have no current ownership interest in the asset.

Joint Tenancy: Property is titled in more than one name. Joint Tenancy can cause many unintended problems for the owner. See Article.

Assets Eligible for Beneficiary or Payable on Death Designations:

Bank Accounts
Insurance Policies
IRAs and 401ks: These financial instruments generally permit the owner to designate who will “inherit” your account when your are gone. If you are married and want leave the account to anyone but your spouse her or she must sign an acknowledgement. A trust can be named as a beneficiary but there are ways to increase the value to the heirs by creating a Stretch IRA Trust. This will permit your beneficiaries to enjoy tax deferred growth of the investment over their lifetimes.
Real Estate: A Transfer on Death document can be filed with the County Clerk. The named beneficiary receives the property by filing an affidavit and death certificate. However, if this is not done within 9 months the property reverts back to the Estate to be administered in Probate. Other disadvantages include the inability to change the designation in a Will or a Trust. The owner must file a revocation with the County Clerk. Also if they sell the property and purchase a new one a new Transfer on Death Deed will need to be filed.
Government Benefits: Some governmental benefits have preset defaults in the event that beneficiaries are not selected or do not survive the owner.

Advantages:

Simple to put into place.
Simple to receive benefits or assets.
Easily understood.
Not included in probate estate, not liable to creditors’ claims.
Private.

Disadvantages:

It is easy to accidentally disinherit someone.
Unintended tax consequences.
A Will or Trust does not take precedence over beneficiary or payable on death choices.
Unless a Trust is named as Beneficiary;
- It is difficult to plan for contingent beneficiaries;
- The Beneficiaries will access to money or property immediately at age 18;
- Creditors of Beneficiaries may be able to attach the asset or money;
- A Special Needs or Minor would need a guardian appointed to manage the money.
Investment and Insurance advisers often fail to provide adequate information.
Failing to keep beneficiaries current in the case of death, marriages, divorce or other changes.
No Asset Protection.
May interfere with heir’s ability to receive government benefits.

Summary:

The use of Beneficiary Designations are a crucial factor to consider when devising an Estate Plan. It is easy to fail to name the proper beneficiaries or to change them as your life situation changes.