If you are like 70% of Michiganders, you have no estate planning documents in place. But you might have attempted your own do-it-yourself mini estate plan through some sort of beneficiary designations. It could be a beneficiary you named on your life insurance or IRA. Or it could be the beneficiary named on your bank or brokerage account through a payable on death or transfer on death designation.
I’ve had people come up to me at parties or other events and ask, “If I have named beneficiaries on all of my accounts and other assets, I do not need a will, right?” Wrong! The exclusive use of beneficiary designations for your estate plan is no substitute for a properly drafted will or trust based estate plan.
Banks and other financial institutions love beneficiary designations, as well as joint accounts, because it is so much easier for them. After your death, all they need is your death certificate, then they make the distributions according to your instructions, and they are done. They do not have to deal with probate court papers or review a trust.
When you open up new accounts, many banks and other financial institutions will encourage you to name beneficiaries or joint owners “to avoid probate”. You are given a false sense of security that you have done proper planning and that your beneficiary designations always will avoid the intrusion of the probate court. But, without additional planning, there is no guarantee that a beneficiary designation will avoid probate court involvement. There can still be probate court activity in many situations.
For one thing, beneficiary designations are death instruments. They only take effect upon your death. If you became mentally incapacitated and could no longer make decisions for yourself, your beneficiaries have no legal authority to make any decisions for you or take care of your stuff. In this situation, the only persons who can make decisions for you are those who have either been appointed by you or by the court.
If you have not appointed a patient advocate in a healthcare power of attorney, a guardian would have to be appointed by the probate court to make your personal decisions such as who will be your caregivers, what medical treatment you will receive or where you are going to live.
If you have not appointed an agent in a financial power of attorney, a conservator would have to be appointed by the probate court to handle your financial affairs such as paying your bills, receiving income and taking care of your property.
If your beneficiary was legally incapacitated at the time of the inheritance distribution, your survivors would have to petition the probate court for a conservator to hold the funds for your beneficiary during that incapacity. Your beneficiary could have a probate court supervised conservator for the rest of the beneficiary’s life.
And if your beneficiary was on SSI or Medicaid, your inheritance would kick the beneficiary off of the SSI and/or Medicaid program until the inheritance was spent down. After the inheritance was spent down, the beneficiary would then have to reapply for SSI and/or Medicaid.
A conservator would also have to be appointed by the probate court for any of your beneficiaries who were minors. The conservator would hold the inheritance for a minor beneficiary until he or she reaches age 18, when that beneficiary amazingly gains all the wisdom and insight of adulthood and is entitled to the entire inheritance. Oftentimes, the beneficiary takes his or her inheritance and goes to the University of Corvette.
If a beneficiary dies before you do and you have not named a successor or contingent beneficiary, the account or proceeds could end up back in your or your beneficiary’s estate, necessitating probate court proceedings. When one of your beneficiaries dies before you do, the inheritance could also go to that beneficiary’s descendants, heirs or spouse. It could also be divided among all of the surviving beneficiaries.
It all depends upon what the beneficiary designation form says. A beneficiary designation is basically a contract between you and your banker, life insurance company, IRA custodian or other account or asset holder. They agree to make a distribution after your death in accordance with your instructions. And you have that little itty-bitty box on the beneficiary form to write down all your instructions.
What you may not know is that your instructions also include all of the terms and conditions of the beneficiary designation form, which are oftentimes pre-printed in teeny-tiny print on the back side of the form. And rarely are any two beneficiary designation forms alike. There is no “standard” beneficiary designation form. I have even seen multiple beneficiary designation forms from the same financial institution.
Read the forms. Know what they say. Know what will happen in various circumstances. Without proper planning, you will find that accounts and other assets with these beneficiary designations could still end up with unintended recipients or in probate court.
You may even attempt to use beneficiary designations as will substitutes by putting different children’s names on various accounts or other assets. These accounts or other assets may have relatively equal values at the time the designations were made. Inevitably, the accounts or other assets do not increase or decrease in value equally because of the investments held in the accounts or other assets. Or one of your beneficiaries could predecease you. Any of these events could easily destroy your plan, and then your intent of equal distributions would not be accomplished.
If your plan is designed to run all of your accounts and other assets through your will or your trust, you can relatively guarantee your planned distributions. The one down side of using a will though, is that it does go through probate.
If probate avoidance is one of your primary goals, the only way to pretty much guarantee no probate court involvement, both during your lifetime and after your death, is with a properly drafted fully funded trust based estate plan. Funding your trust includes the proper naming of your trust or individuals as owner or beneficiary of your assets and as additional insureds on your liability insurance policies.
The funding of your trust is critical in making your trust work and having the results that you anticipate. Failure to properly fund your trust will cause unintended consequences, which could include probate, distributions not in accordance with your instructions and other than you planned, additional taxes and additional administrative and legal expenses.
With a properly drafted fully funded trust based estate plan, you are also in control during your lifetime, you and your loved ones are provided for in the event of your mental disability, and when you are gone, you can give what you have to whom you want, when you want, the way you want.
By Matthew M. Wallace, CPA, JD
Published edited August 12, 2012 in The Times Herald newspaper, Port Huron, Michigan as: Beneficiary designations don’t make estate plan