Over half of Michiganders have done no estate planning. You may still have a plan, but you may have not written yourself. You may have done your own mini estate plan with beneficiary designations or joint ownership. This may have been done upon the recommendation of your banker, credit union representative, broker or life insurance agent when you opened up the new account.
There is no lack of people willing to give estate planning advice. When you opened that 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 beneficiaries will get your account or asset.
Unfortunately, the persons giving this estate planning advice are not estate planning specialists and often do not understand the legal consequences of such advice. What we see in our office on a regular basis is these do-it-yourself plans that blow up. We see this so often that we have put a sign in each of our conference rooms that says: “When doing your homework, please follow our instructions. If instead you follow the advice from Bankers, Financial Advisors, Insurance Agents, Register of Deeds, or other Advisors, it will cost you more money.”
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.
What you are often told when filling out a beneficiary form is that all you have to do is list your beneficiaries and sign it. Sometimes you are told that you can use the default provisions of the form so you do not need to fill anything out, all you have to do is sign it. And you do sign it without even reading it, even though there is lots of small print on the front and/or on the back of the form.
This may have happened to you if you were a Bank of America IRA customer. The default provisions in the Bank of America IRA beneficiary form was to your spouse. If your spouse was not surviving, then to your estate. However, if your IRA is now at Huntington Bank, the beneficiary default is your estate.
So if you were married, wanted your IRA to go to your spouse and listened to your Bank of America banker, you did not write down any primary or contingent beneficiary. They told you that you did not need to. It was going to your spouse anyway. Not!
When Huntington Bank bought the Bank of America branches in the Port Huron area and transferred the accounts, they only transferred over the written IRA beneficiaries. If you did not name a beneficiary because you were relying upon Bank of America defaults, you are now subject to Huntington Bank defaults. You entire IRA will now go through your probate estate, and not necessarily to your spouse.
This could come as a shock to your surviving spouse, or other beneficiaries. We’ve had three couples come through our office in the last couple of weeks who had no named beneficiaries of their Huntington IRAs, which used to be held at Bank of America and going to the surviving spouse under the default provisions. The IRAs would now go to their estates and be probated. They thought that the spousal beneficiaries they had with Bank of America were still in place.
And if you have an inherited IRA now at Huntington Bank, the results are even worse. According to Huntington Bank’s Welcome Guide to former Bank of America customers, Huntington Bank does not support inherited IRA beneficiaries. If you have an inherited IRA at Huntington Bank, you have no beneficiaries on that account, even if you had them at Bank of America. Upon your death, your Huntington Bank inherited IRA will go through your probate estate, unless your estate meets the small estate guidelines.
You financial institution representatives may have told you that you were filling out a “standard” beneficiary designation form. However, there is no “standard” beneficiary designation form. Rarely are any two beneficiary designation forms alike. I often see different beneficiary designation forms from different departments of the same financial institution.
What happens if a beneficiary named in your beneficiary form dies before you do? Sometimes the form says the share will be divided among the other remaining named beneficiaries. Other forms state that the share will go to the deceased beneficiary’s descendants, while still other forms say that the share goes to the beneficiary’s heirs, which usually includes the beneficiary’s descendants and surviving spouse. The deceased beneficiary’s share goes to the beneficiary’s probate estate in still other forms. I have even seen forms that say a deceased beneficiary’s share goes back to your probate estate.
If a beneficiary is a minor, a probate court ordered conservator will need to be appointed to hold the minor’s share until age 18. At age 18, the minor miraculously gains all the wisdom and insight of adulthood, including the ability to handle large sums of money, and the court releases the conservator funds to the beneficiary. The beneficiary often goes to college, the University of Corvette.
When a beneficiary is mentally disabled, a probate court ordered conservator will also need to be appointed to hold the beneficiary’s share, typically for the rest of his or her life. And if that disabled beneficiary is receiving some sort of income or asset based governmental assistance, the inheritance will disqualify him or her from that assistance until the inheritance is spent down.
You may attempt your own do-it-yourself mini estate plan and set up separate transfer on death (“TOD”) accounts for each of the kids and transferred equal amounts of stocks and other securities into each of those accounts. Inevitably, since each of the TOD accounts hold different securities, they increase or decrease in value at different rates, and you are constantly moving securities between the accounts to keep them balanced. Unless you rebalance the TOD accounts daily, which I have never seen, there is no assurance that each of the kids will get an equal share.
And there is no creditor protection for the amounts distributed through beneficiary designations. If a beneficiary is sued and gets a big judgment against him or her, the entire inheritance could end up in the hands of the beneficiary’s creditors.
If the beneficiary is married, the inheritance is often just deposited in an account that is joint with the beneficiary’s spouse. Since the inheritance is now comingled with marital property, it will then typically be considered part of the property settlement upon the beneficiary’s divorce.
Do we use beneficiary designations in our practice? Absolutely! We use them all the time, but only as part of a coordinated will or trust based estate plan. If an account or asset can be retitled without creating adverse tax consequences, we remove any beneficiary designations and then retitle that account or asset into the name of your trust. For the rest of your accounts or assets, we typically name your trust as the primary beneficiary, with your spouse and/or kids as the contingent beneficiary.
This is funding your trust. If you recall from my previous columns, trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets.
With this type of planning, all your instructions are in one place, your trust. And if you want to make a change, you only have to change it in one place, your trust. You do not have to worry about all of those beneficiaries on all of your accounts.
With proper planning, you can stay in control while you are alive and well, provide for you and your loved ones in the event of your mental disability, and after you are gone, give what you have to whom you want, when you want, the way you want, all at the lowest overall cost to you and your loved ones.
By: Matthew M. Wallace, CPA, JD
Published edited December 21, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Are you aware of who your beneficiary is?