Probate Avoidance in Estate Planning and Beneficiary Designations

Beneficiary designations are a central feature of estate planning. This is because beneficiary designations that are valid and in place at the time of your death direct the payment of funds to the beneficiary listed, regardless of what is stated in your Will or Trust. Beneficiary designations allow funds to bypass the probate process entirely, giving your beneficiary quick access to funds without court involvement. Ultimately, beneficiary designations are an extremely important feature of your estate plan if you are seeking to avoid probate.

Types of financial accounts with the beneficiary designation feature include: Retirement Accounts such as IRAs, 401(k)s, 403(b)s, and pensions; Life Insurance Policies where proceeds are distributed to the named beneficiaries; Bank Accounts such as Checking, Savings, Investment and Brokerage Accounts; Annuities and Health Savings Accounts. Types of beneficiary designations include: Payable on Death (POD); Transfer on Death (TOD); Primary Beneficiary; Secondary Beneficiary; Contingent Beneficiary. In the case of a joint account with right of survivorship, the account will pass to the surviving account owner on the death of the other account holder before the beneficiary designation takes effect. It is important to understand the type of account ownership you have and the difference between an authorized signer, authorized user, account owner, and whether there are survivorship rights for the account.

Like the name suggests, “beneficiary designations” designate the beneficiaries of your financial accounts when you die, avoiding probate altogether. The designations direct funds to be distributed directly to your beneficiary on your death according to the contractual agreement with the financial institution (not your Will).  Because the funds with valid beneficiary designations are transferred according to your contract with the financial institution, they are not sitting in your estate at the time of your death, requiring probate in order to pass to your heirs or beneficiaries. A central concept in probate avoidance is understanding the difference between probate assets and nonprobate assets. Probate assets are all the assets that require the probate court in order to transfer ownership. Nonprobate assets, quite simply, do not need to go through probate court to transfer ownership. Again, your Will only controls the probate assets, i.e. the assets in the “probate estate”. Financial accounts with valid beneficiary designations in place at the time of your death are “nonprobate assets” and do not go into the “probate estate”. The designations direct funds to be distributed directly to your beneficiary on your death according to the contractual agreement with the financial institution.  This means that your Will (or Trust) does not control, change, amend or fix beneficiary designations. It also means that probate of your Will is not necessary for your designated beneficiaries to quickly gain access to those funds after you pass away.

Transfer deeds actually work similarly to beneficiary designations to avoid probate, because transfer deeds take the real estate interest out of the probate estate and make it a nonprobate assets. A typical probate avoidance estate plan might use transfer deeds and beneficiary designations as the primary mechanisms for probate avoidance, regardless of whether the estate plan is a Will-based plan or a Trust-based plan. This is because beneficiary designations and transfer deeds transfer assets directly to either an individual or a Trust without the necessity of probate, and if all transfers are accomplished with transfer deeds and beneficiary designations, the probate of the Will may not be necessary.

A word about qualified benefit plans and life insurance policies: If you are using a Trust-based plan, then after you have created your Trust, the next step is to fund your Trusts. Funding your Trust is vital if you want the Trust to actually control the assets as intended. Funding your trust requires re-titling your assets in the name of the Trust. The problem is that you cannot re-title qualified benefit plans, such as IRA, 401Ks, 403bs, etc., into the name of the Trust during your lifetime because a change in ownership would be treated as a taxable early withdrawal. The solution is to designate the Trust as beneficiary on your death. Similarly, life insurance policies cannot change ownership during your lifetime, but b`eneficiary designations may be used to direct those funds to go into your Trust on your death. So, beneficiary designations must be used if you are seeking to avoid probate and intending for your Trust to control the proceeds of your qualified benefit plans or life insurance policies.

Be careful with designating a minor child as a beneficiary. It can create problems if the child has not attained the age of 18 at the time of distribution. This is because minors cannot receive outright distributions directly. A guardianship of the estate of minor child or Trust may be needed for the child to receive the benefit of the funds. Trusts should be used when the beneficiary is a minor child, has special needs, or when more control over the timing and manner of distributions is desired.

Because life changes happen, it is imporant to periodically review your beneficiary designations to be sure they are still in line with your wishes. Also, be sure all the names are spelled correctly and match the full legal name of your beneficiary. If your financial institution changes ownership or issues an overall account change notice, double check to be sure your beneficiary designations are still in place. The need to review your beneficiary designations is vital after major life changes like marriage, divorce, or the birth of children. Again, your Will or Trust will not change or update your beneficiary designations, and your beneficiary designations can actually override your Will or Trust. So, it is extremely important to be sure they align with your estate plan goals.

>>> Note that even if all possible estate planning is done to avoid probate, it is still advisable to have a Will in place just in case probate is necessary. That is because assets can come into the estate unexpectedly (such as insurance payouts, lawsuit settlements and awards, previously unknown disributions, refunds, rebates, inheritances, etc.,) and so you should have a Will just in case. Probate without a Will is more difficult, expensive and time consuming than probate with a Will. Additionally, probate may be necessary to appoint an Executor in order to conduct estate business, even if probate is not strictly necessary to pass assets. This could happen if there is the need to: evict a tenant; research, investigate and secure estate property; manage the payment of debts to creditors; carry on a lawsuit on behalf of the Estate such as a wrongful death lawsuit, wrap up a business; or deal with other financial, legal or tax matters on behalf of the estate.

At the Law Office of Laura Vale, PLLC, we help Texas families create comprehensive probate avoidance estate plans that protect their loved ones and avoid unnecessary legal complications. If you would like to review your beneficiary designations or update your estate plan, call us today at 210-588-9881 to schedule a consultation.