Just a couple days ago I had a client that asked me this question. This particular client had a house that was going to one single beneficiary which was her son, she had a few bank accounts and some IRA’s.  She had a beneficiary designation set up on everything already except for the house.  In this blog, I will try to explain the nuances of beneficiary designations the way that I explained it to my client that day. So without further ado, let’s jump right in.

Beneficiary designations can be used for many assets. Retirement accounts and investment accounts can name beneficiaries to receive your assets upon your passing. Bank accounts use Pay on Death (“POD”) or Transfer on Death (“TOD”) designations that allow the bank to transfer the accounts to your named beneficiary upon your death.

My client had already done most of her homework and had her son named as the beneficiary on her 401K account, her IRA, and her bank accounts. Her only asset that was vulnerable to probate was her house.

In Arizona, we have something called a beneficiary deed. Not all states have beneficiary deeds and some states have something similar but call them by a different name. A beneficiary deed is a legal document that allows a property owner to transfer real estate to one or more designated beneficiaries upon their death, without the need for probate. This type of deed provides a way for property owners to ensure that their property automatically passes to their chosen beneficiaries, and prevents the need for probate. I discussed using a beneficiary deed for my client’s house.

 

The risks of using Beneficiary Designations

The biggest risk of using a beneficiary deed is naming more than one beneficiary to inherit the property. This can lead to disputes among the several heirs regarding what to do with the property. The disputes may lead to the need for legal action in court to resolve the dispute.

A beneficiary deed may conflict with other estate planning documents. If the property owner has outstanding debts or liabilities, creditors may have claims against the property which could affect the beneficiaries’ ability to inherit the property free and clear.

Beneficiary deeds are only used for real property and may not be used for other types of property. If the beneficiary deed contains errors in the legal description or other errors, the problem may not be discovered until after your death and then it is too late to correct the error.

 

The other option to avoid Probate: Living Trusts

Having a living trust is another document that allows you to avoid probate. If you transfer all of your assets into the living trust, you can avoid the probate process and expense. Using a trust can also provide much more flexibility and control even after you pass. They provide privacy as they do not become public record like a will does. They provide a method of asset management even if you become incapacitated. A revocable trust is a great tool that has many benefits; however, it is a more expensive option and people often cannot afford to create a trust.

After I discussed the pros and cons of the beneficiary deed and using beneficiary designations on the other assets and the pros and cons of a revocable trust, we decided the risks were small in her unique situation and decided to use beneficiary designations in lieu of a living Trust. This allowed my client to save money but still create a plan to avoid probate and have her son inherit her assets as seamlessly as possible.

 

Can’t Decide Which Option Is Best For You?  Talk With An Experienced Estate Planning Attorney Today

Every situation is unique and beneficiary designations may be helpful to you in your estate plan, but be sure to speak to an attorney to make sure you have a complete plan and that you are doing everything correctly. If your plan is incomplete or incorrect, your assets may not end up in the hands of the people you want to inherit your assets or your estate may end up in probate. Click below to discuss your unique plan and I can help you step by step.