Beneficiary designations are an efficient and effective way to transfer your inheritance to your loved ones without them having to go through a costly and lengthy probate. In many cases, it is relatively simple.
As an example, let’s imagine our client, Sue, is a widow with two adult children. Sue wants them to inherit her estate in equal shares. She names her son and daughter each as a 50% beneficiary on her:
- Money Market accounts
- Certificate of deposits (CDs)
- Savings Account
After Sue passes, her children complete a request to the bank for the distribution and submits the request with a copy of her death certificate. Both children receive their 50% share of the Money Market, CDs, and savings account within weeks.
Although this process can work well, it is risky to have beneficiary designations serve as your only means of estate planning. You should always couple this with a Will or a Trust. This is because there is potential for beneficiary designations to fail, resulting in your estate plan not meeting your goals. Two of the most common ways beneficiary designations fail are: (1) you are mistaken in who you believe you named as a beneficiary; and, (2) the person you named dies before you.
The first problem has an easy fix
You can contact each of the financial institutions that hold your assets and ask them to mail you a document confirming who you have named. Usually this request can be made by phone. You may also be able to log in to an account online and obtain this information electronically.
Let’s assume Sue is recently a widow and thought she and her late husband had named their two children as contingent beneficiaries. Following her attorney’s advice, she calls her bank and discovers that she, in fact, has no beneficiaries named. They mail her a form to name her children. She completes it and brings it into her local branch. First problem solved.
The second problem can be more complicated
Each financial institution (your bank, credit union, etc.) has their own policy on what happens if your named beneficiary predeceases you. Common ways financial institutions address predeceased beneficiaries are that their share passes instead:
- To the other people you named who survive you; or,
- To your estate – resulting in the need for a probate.
In addition, although some financial institutions allow you to name contingent beneficiaries, not all financial institutions treat contingencies the same. The two common ways contingent beneficiaries are treated by financial institutions include:
Turning back to Sue: now assume Sue’s son tragically predeceases her. After Sue passes, her daughter contacts the bank and is told that under their policy, because a named beneficiary predeceased Sue, his share must be paid out to Sue’s estate. As a result her daughter inherits her half outside of probate, but the other half must now go through the lengthy and costly probate process. Because Sue’s will divides her estate assets between her son and daughter, her daughter will also inherit half of the probate assets. The other half will go to her son’s children. This was not what Sue wanted. She intended for her son’s children to inherit his full half of the estate assets.
As you can see, some of the policies of the financial institutions may align with your estate planning goals. But there may also be unintended consequences that significantly alter your plan. The only way to know how each of your financial institutions will handle a predeceased designee, however, is to contact them and ask them to provide their policy on contingent and/or predeceased beneficiaries. It is essential to with an estate planning professional to ensure that your beneficiary designations compliment your estate planning goals.
Johnson Bank – 6 Estate Planning Steps to Take Now