10 Oct Are Beneficiary Designations Beneficial To My Beneficiary?
Beneficiary designations (where you name one or more beneficiaries to receive assets of yours upon your death) are sometimes a great and simple tool in estate planning, but sometimes, they could lead to a disastrous result. Beneficiary designations supersede your will. Thus, there could be avoidance of the probate process whereby the court has to determine if your will is valid. If the world were perfect and you knew that nothing bad would happen to the beneficiaries prior to your death (i.e., disability, creditor problems, addiction, the beneficiary on public benefits, potential loss of college scholarship, divorce, or even if the beneficiary predeceases you, etc.), then beneficiary designations could be a wonderful tool for probate avoidance. However, the world is not perfect. The good news is that you can change your beneficiary if you find out there is a problem – assuming you knew of the problem and that you had mental capacity when something negative occurred.
Examples of Beneficiary Designations:
1. Life Insurance Policies and some Annuities
It is not unusual to name a beneficiary or beneficiaries and alternate beneficiaries if you own a life insurance policy or annuity. For example, the life insurance policy owner may (with a policy to pay on the owner’s death) name a spouse as a primary beneficiary and children, per stirpes (children’s descendants take the share of your child if both your spouse and that child of yours predeceases you) as contingent beneficiaries. However, what if the beneficiary was a minor? Court-ordered guardianship may then be needed to control the funds until that beneficiary reaches the age of majority (and that beneficiary might not be mature enough to handle the funds at that time). Would it bother the life insurance owner that a college scholarship was lost as a result of the receipt of policy proceeds? What if there was a mistake in completing the form, and there wasn’t time to correct the error? What if it was the wrong form?
2. Paid on Death Accounts
There are 7 different ways bank accounts can be established in Texas. One way is for the signature card to indicate it is to be “payable on death” (POD) to the beneficiary. All the beneficiary would then need is a death certificate to get the funds held in the account (checking, savings, CD, etc.). However, it is not unusual for banks to merge and lose the original signature card in the transition. Furthermore, will the owner of the account remember to change the beneficiary designation when various life events occur? Many times a trust is named as the beneficiary of a POD account since the trust can dictate many of the “what ifs” of the account owner.
3. Transfer on Death Accounts
This is similar to a POD designation used at banks, but it is called “transfer on death” (TOD) at investment firms. What if your account was jointly owned your joint owner lost mental capacity, and you wanted to change your designated beneficiary? The financial institution may give you a problem unless you have adequate authority.
4. Retirement Accounts
Retirement accounts typically have a named beneficiary. However, the retirement account often needs to consider issues concerning taxes, creditors, and potential loss of public benefits when naming a beneficiary. For example, we had a case where it took over a decade (due to the wait list) to get a valuable Medicaid benefit (there are numerous Medicaid programs) for a disabled child. Medicaid benefits are often “means-tested” (the government looks at your assets). The disabled child lived for decades at a group home available to only those who were on that certain type of Medicaid benefit. An uncle of the disabled child left her $200,000 from his retirement account, which potentially resulted in the loss of valuable Medicaid benefits and forced her to move from the group home. If the uncle had talked with an elder law attorney, he could have created a supplemental needs trust, which would have prevented the beneficiary from losing her public benefit, moving from the group home, and even having a tax benefit since a disabled beneficiary can stretch distributions over lifetime resulting in tax-deferred growth. Also, the retirement account owner should consider the beneficiary’s creditor issues. Most states (unlike Texas) do not give creditor protection.
5. Transfer on Death Deed
Texas, like many states, permits Transfer on Death deeds (TODD). Your real estate could avoid probate by using a TODD. It should be noted that if you own the property as community property with your spouse, then both spouses would need to sign the deed. If the property was separate property but is used as a homestead by your surviving spouse, then the surviving spouse would have the right to live there for life as long as he or she maintains the property. You can cancel your TODD as long as you have mental capacity. However, an agent under a power of attorney cannot sign a TODD on your behalf (unlike an enhanced life estate “Ladybird” deed, which also avoids probate). Also, if you have more than one beneficiary (grantee), will they always agree on what to do with the property?
6. Motor Vehicle Beneficiary Designation
Texas has a form (VTR-121) issued through the Department of Motor Vehicles (DMV) (in addition to Texas title and/or registration) whereby you can retain ownership of your car and designate to whom you want it to pass on your death. Similar to other beneficiary designations, you retain total control during your life. You can sell the vehicle, change the beneficiary designation, etc., without the consent of the beneficiary. It should be noted that the beneficiary must submit the required information within 180 days of your passing, or else the vehicle will pass by probate or laws of intestacy. Also, both TODDs and a beneficiary designation of a motor vehicle avoid a successful claim from the Medicaid Estate Recovery Program of Texas.
Beneficiary designations can be helpful, but the owner should always remember to (1) update beneficiary designations due to life changes, (2) be careful if the beneficiary is a minor, (3) consider tax implications, and (4) consider possible public benefits if the beneficiary is or could become disabled. Blended family issues are usually a red flag for estate planners. A beneficiary designation can be simple, but many issues could affect our beneficiary or beneficiaries during life. So, proper protection should also be considered.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.