You go to your bank, credit union or broker to open up a new account. You are encouraged to name beneficiaries or joint owners because if something happens to you (i.e. you die), the account “will avoid probate”. You are given a false sense of security that you have done proper planning and that your beneficiary designations always will give what you have to whom you want, when you want and the way you want.
My associate Buzz Suuppi and I often have people come up to us at social or professional gatherings and events and the conversation usually goes something like this: “If I have named beneficiaries on all of my accounts and other assets, I do not need a will, right?” “Wrong!” “Why?” “We do not have enough time at this venue to answer that question properly.” Well, today we will endeavor to answer that question in this week’s column.
If you are like 70% of Michiganders, you have done no estate planning. But you may think that you have a plan in place since you have attempted your own do-it-yourself mini estate plan through some sort of beneficiary designations. These designations include not only the beneficiaries you name on your bank, credit union or brokerage account through a payable on death or transfer on death designation, it also includes the beneficiaries you name on your life insurance, annuity, IRA or retirement 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 a certified copy of your death certificate, then they make the distributions according to the designations, and they are done. They are out of the loop. They do not have to deal with probate court papers or review a trust.
The exclusive use of beneficiary designations for your estate plan is no substitute for a properly drafted will or trust based estate plan. Without additional planning, there is no assurance that beneficiary designations will avoid the intrusion of the probate court. 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 directly by you or by the probate court.
If you have not appointed an financial 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 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 or mental healthcare treatment you will receive or where you are going to live.
After your death, 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 that beneficiary’s lifetime.
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. Only after the inheritance was spent down, could the beneficiary be able 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 college, 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 different departments of 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 variety of investments held in the accounts. 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 be relatively assured that your planned distributions will be made. One down side of using a will though, is that it does go through probate. But this is better that than having unintended distributions.
If probate avoidance is one of your primary goals, one of the few ways to be assured of 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 owners or beneficiaries 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 for which you have planned. Failure to properly fund your trust will cause unintended consequences. These could include probate; distributions not in accordance with your instructions and other than you planned; additional taxes; and additional administrative, legal and other expenses.
With a properly drafted fully funded trust based estate plan, you are in control during your lifetime when you are alive and well; 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; all at the lowest predictable overall cost to you and your loved ones.
By: Matthew M. Wallace, CPA, JD
Published edited August 3, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Beneficiary designations not substitute for estate plan