Probate avoidance is often a key goal for our estate planning clients. Sometimes that is best addressed by establishing a living trust. In other cases it might be just as efficient to focus on beneficiary designations. In fact, even when a living trust is involved, beneficiary designations help meet the purposes of the trust.
At Fleming & Curti, PLC, we host a periodic program for our clients and colleagues and their friends. This week we will address beneficiary designations in another session of our popular “trust school.” We will focus on coordinating beneficiary designations with your living trust, but the same advice should help individuals focus on probate avoidance generally.
What assets have beneficiary designations
Surprisingly, almost any asset can identify a beneficiary who will receive the property automatically at the owner’s death. In Arizona, and in most states, at least these assets can include a beneficiary designation:
- Bank accounts (often these are called “pay on death” (POD) or “in trust for” (ITF) accounts).
- Brokerage accounts, mutual funds, stocks and bonds (using a “transfer on death” or TOD designation).
- Retirement accounts — including 401(k) accounts, Individual Retirement Accounts (IRAs), Roth IRAs and other defined contribution accounts.
- Real estate (in Arizona, a “beneficiary deed” can list a recipient effective on the owner’s death — not every state has a similar option, and some which do use a different name).
- Automobiles and other vehicles (the Motor Vehicle Division even has a form online).
- Others, like Limited Liability Company (LLC) or partnership interests may be possible, too. They will often be a little more challenging.
There are problems with using beneficiary designations for probate avoidance. If you seek to change your plan, for instance, you will need to update each and every beneficiary form. Each company you deal with might interpret the designation differently upon the divorce or death of a named beneficiary, for instance.
Probate avoidance is not the only goal
While probate avoidance is often a key goal, it should not be your only consideration. You also need to think about tax efficiency (both income and estate taxes). Your estate plan can help address your children’s asset protection concerns. A trust might also help protect your heirs from themselves, or maintain eligibility for government benefits.
Assuming you decide to establish a living trust, beneficiary designations are still key. Normally your assets will belong to the trust during your life. Some assets, though, might name the trust as beneficiary.
If you don’t want to create a living trust, you can still sign a trust for each of your beneficiaries. Then you might name each trust as beneficiary, rather than the individual. You might, for example, name “The John Smith Irrevocable Trust Dated August 21, 2017” as beneficiary for 50% of your mutual fund account. Just don’t name John Smith directly, or the trust will be at least partially ineffective.
What could go wrong?
Lots of things. A few to particularly look out for:
- Schedule a time — perhaps once a year — to check on beneficiary designations. You might be surprised by how often our clients have designations that fail to match their memories.
- Watch out for changes in your family. If a named beneficiary dies, divorces, remarries, becomes disabled, or demonstrates very poor judgment, you might want to make a change of your own. That means more than updating your estate plan, because those beneficiary designations are part of your estate plan.
- Things can change for you, too. One of the most-common problems we see involves financial advisers. If your stockbroker moves to a new company, for instance, the beneficiary designations might not follow to the new accounts. Or perhaps your assets have changed — your IRA has become a smaller portion of your estate, or you have less real estate, for example. That might affect your overall estate plan, and beneficiary designations can exaggerate that problem.
Finally, here is a key piece of advice: review your entire estate plan with your attorney once every five years or so. The review should be quicker if you have had major life changes like retirement, a family death, a move to a new state or a major change in finances. Expect to look up your current beneficiary designations and give your lawyer the forms as part of that review.
Probate avoidance, coordination of your estate plan and tax efficiency are all important goals. You can help your attorney help you achieve all of them by paying better attention to your beneficiary designations.