Do-It-Yourself Beneficiary Designation Planning Unwise

You have named beneficiaries on everything you could because you thought it was the right thing to do. You have named beneficiaries on your bank accounts, investments, retirement accounts and life insurance. Your banker told you to do it. Your financial advisor told you to do it. And your life insurance agent told you to do it too. But did you have all those beneficiary designations reviewed by your estate planner to make sure they were coordinated and consistent with your will or trust?

Under current Michigan law, you can name a beneficiary on just about any financial asset. Banks and other financial institutions love beneficiary designations. It’s so easy for them. After a death, they do not have to bother with reviewing probate documents or trusts. You show them a death certificate, and they release the funds to the beneficiaries. Their legal responsibilities are done.

When you go to your bank, credit union, financial advisor or life insurance agent to open up a new account or policy, you are encouraged to name beneficiaries. You are told that if something happens to you (i.e. you die), the account “will avoid probate” and go directly to your beneficiaries. You are given a form and you list the beneficiary names and personal information, but you are not given any room to put any distribution instructions on the form.

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. The problem is that beneficiary designations do not always work as intended.

The sole reliance upon beneficiary designations as your do-it-yourself 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, if you have done no other planning, the only persons who can make decisions for you are those who have either been appointed by the probate court.

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. 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 health care treatment you will receive or where you are going to live.

In most instances, you can avoid a court appointed conservator with a properly drafted financial power of attorney. Similarly, in most instances you can avoid a court appointed guardian with a properly drafted health care power of attorney, which is also called a designation of  patient advocate.

I have also seen probate court involvement with beneficiary designations after a death. A beneficiary designation is nothing more than a contract. It is a contract that is between the owner of the account and the financial services company holding the funds. The holder of the funds agrees distribute the funds according to that contract upon the owner’s death.

There is no standard beneficiary form. Every financial services company’s beneficiary form is different and a company’s forms could be different between different departments. The account owner has an itty bitty box to put all of the beneficiary instructions on the form. 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 or in the account agreement.

After your death, if your beneficiary was mentally 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 their lifetime.

And if your beneficiary was on SSI or Medicaid, your inheritance would kick them 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 beneficiary who was a minor. The conservator would hold the inheritance for the minor beneficiary until age 18, when that beneficiary miraculously gains all the wisdom and insight of adulthood and is able to manage large sums of money. At age 18, the beneficiary is entitled to the release of the entire inheritance to them. Oftentimes, the beneficiary takes the inheritance and goes to college, the University of Corvette.

If a beneficiary dies before you do, the inheritance could go to the beneficiary’s descendants, heirs or spouse, or to other named beneficiaries, depending what the beneficiary designation form instructions say. The account or proceeds could end up back in your or your beneficiary’s estate, necessitating probate court proceedings.

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.

And once the beneficiary gets the funds, they are also fully accessible by that beneficiary’s creditors, including ex-spouses. I saw one case in which the ex-spouse garnished over $100,000 from a beneficiary’s distribution. That probably was not what the parents intended.

Consequently, I only recommend using beneficiary designations as an exclusive estate planning tool if you can guarantee that none of your beneficiaries is a minor, gets divorced, gets sued, gets sick, or dies in the wrong order. And of course, you can’t.

Beneficiary designations are not a substitute for a properly drafted estate plan which, at a minimum, includes financial and health care powers of attorney and a will, and often includes a revocable living trust. You can avoid these problems of beneficiary designations by having a properly drafted will or trust based estate plan, and coordinating beneficiary designations with that plan. Have all your beneficiary designations reviewed by your estate planner to make sure they are consistent with your plan.

Without this additional planning, there is no assurance that beneficiary designations will avoid the intrusion of the probate court. With this proper planning, you increase the likelihood that you can stay in control of your assets while you’re alive and well, provide for you and your loved ones in the event of your mental disability, and when you’re 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 August 27, 2017 in The Times Herald newspaper Port Huron, Michigan as: Do-it-yourself beneficiary designation planning unwise

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