People often put off their estate planning because they think that it is expensive. But there is a simple strategy that costs nothing and can save you thousands of dollars. It supersedes all other estate planning and even avoids probate. Failure to implement this strategy correctly, however, could end up costing you thousands.
Directing the transfer of your assets upon your death is a fundamental part of estate planning. A will is the most common method of accomplishing this, but there are other ways.
An example that you are most likely familiar with is your bank account. When you open a bank account, you are entering into a contractual relationship with the bank. The terms of this relationship are defined in a contract (commonly referred to as the signature card). In addition to identifying the owner of the account, you have the option to name a beneficiary in the event of your death. This is referred to as the Payable on Death (POD) beneficiary. A similar contractual relationship exists for investment accounts, retirement accounts and life insurance.
Because the transfer of the account occurs under the terms of the contract between you and your bank, there is no need to involve the probate court.
Unfortunately not everyone is made aware that they can designate a beneficiary, or they never get around to it. When this happens, then your estate becomes the default owner of the account and you must go through probate court in order to transfer the money.
Sometimes the expense of going through probate to exceeds the value of the account, and clients simply abandon the account. But even if there is enough money in the account to justify going through probate, the value of what the beneficiaries receive will be eaten away by legal fees.
Other disadvantages of going through probate are that the account will be exposed to creditor claims and it may end up being distributed in a way that you did not want.
Designating a beneficiary is a simple and efficient way to make sure none of this happens and the account goes to exactly whom you want.
Although this is an easy strategy to implement, there are pitfalls to watch out for. For example, certain beneficiaries require special care when being designated, like minors, incapacitated persons, and persons receiving public benefits. Also, some beneficiaries need to be removed or replaced, like deceased beneficiaries or ex-spouses.
I experienced this myself when I reviewed a bank account that I had not used for a long time. The beneficiary designated on the account was my father, but he is now deceased. If the account were to stay this way, on my death, my wife would have to go through probate to collect the money.
A single account without a beneficiary can destroy careful planning to avoid probate.
Beneficiary designations are a simple decisions which can have powerful implications for your estate planning. You should consult an estate planning attorney to help you make the right decision for your estate.
We would be happy to review your beneficiary designations with you and talk about overall estate planning goals. Give us a call to schedule a consultation.