Beneficiary designations and other non-probate transfers are an often-overlooked part of estate planning. They are overlooked by clients and sometimes even by professionals.
When planning what would happen to your assets at death, most of us think, “oh, that’s simple, I need to do a Will to take care of that!” But, that’s just part of the process. You almost certainly have assets that are controlled by beneficiary designations or other non-probate transfers.
Let’s look at an example. Mary has a bank account with $20,000, a home worth $300,000, a brokerage account worth $400,000, and an IRA worth $500,000. She also has typical home furnishings. Let’s say Mary’s Will leaves everything to her son, John. It’s entirely possible John may only get the home furnishings. How could this be? Let’s look further.
Mary’s bank account has a POD (Pay on Death) designation in favor of her brother, Sam. A POD designation is similar to a beneficiary designation. Mary’s house is subject to a TOD (Transfer on Death) deed, also naming Sam. Such a deed automatically transfers the real estate upon the death of the owner, much like joint tenancy. Mary’s brokerage account has a beneficiary designation, naming Sam. Jane is the beneficiary designated on Mary’s IRA.
Thus, even assuming Mary has a valid Will leaving everything to her son, John, he won’t get the vast majority of her wealth. How can this be? All of her assets other than her home furnishings are controlled by the non-probate transfers. In other words, they will bypass her probate estate. Her Will directs what happens with her probate estate. It has no control over her non-probate dispositions.
Non-probate transfers can be a very useful and easy way to plan in some circumstances. But, they must be used very carefully. If Mary wants everything to go to her son, John, then she’d need to change those non-probate transfers, too. If Mary forgets to do so, the bulk of her wealth will go to her brother, Sam, and her sister, Jane. Maybe Sam and Jane will abide by the wishes expressed in Mary’s Will. Or maybe they won’t. They would not be legally bound to do so. This could cause a rift in the family just when they need each other the most. Even if Sam and Jane are willing to pass the other assets to John, they may not be able to do so or it could have adverse consequences for them.
Let’s say Sam has creditors of his own. Sam may not be able to give assets away as doing so could be a fraudulent transfer.
Jane couldn’t simply transfer the IRA to John. She may be able to “disclaim” or refuse the asset. In that case, it may go to John if there’s not another beneficiary and if it would go to the estate. However, John would be stuck with a 5-year payout on the IRA, which would be faster than if Mary had named him directly. If Mary’s IRA named a contingent beneficiary, they’d have to agree to disclaim, too, even for this to work. As you can see, this could be quite complicated.
Beneficiary designations and other non-probate transfers are a common, often-overlooked part of estate planning. A qualified estate planning attorney can help make sure your beneficiary designations and other non-probate transfers are coordinated with the rest of your estate plan.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128