Clients often ask questions about the use of beneficiary designations in their estate planning. Beneficiary designations can be a convenient way to avoid probate in some situations. If an individual is named as a direct beneficiary on an asset, that asset passes automatically to that individual, regardless of the terms of the decedent’s Will, Trust, or other estate planning documents.
Your attorney will often recommend that you coordinate your Payable-on-Death (POD) beneficiary designations or Transfer-on-Death (TOD) beneficiary designations to follow the distribution patterns in your overall estate plan for the purpose of avoiding probate. Despite the convenience, however, there are several good reasons to consider alternatives to direct beneficiary designations.
1. When you name direct beneficiaries using TOD and POD beneficiary designations to transfer all of your assets directly to those named beneficiaries, there is no one in charge of settling your estate. Furthermore, naming direct beneficiaries means there is no funding mechanism so that the person in charge can pay for funeral and burial, medical bills, debts, and administration expenses.
2. If you have relied on TOD and POD beneficiary designations to transfer all of your assets on death, there is no legal method for handling the disposition of tangible personal property, such as household furniture and furnishings, personal effects of sentimental value, motor vehicles, RVs, and watercraft.
3. While using TOD and POD beneficiary designations avoids the need to have an executor or personal representative appointed, this means that there is no one with the legal authority to file final income tax returns for the decedent. A trustee of a revocable trust has this authority, and so does the executor or personal representative named in a Will. The personal representative named in a Will has no legal authority unless there is a probate proceeding which admits the Will to probate.
In addition to the potential complications above, there are unique complications with respect to Transfer on Death (TOD) deeds for the purpose of transferring real estate without probate.
1. A TOD deed designating multiple children will effectively transfer title of the real estate directly to those children without probate proceedings. While the ease of transfer is convenient, none of the children have a greater say in the maintenance and disposition of the real estate. This can leave children in an untenable situation if they disagree about the disposition of the property, such as whether to sell the property or whether to make improvements to the property to prepare it for sale; not to mention the expenses in maintaining the property in the interim. The TOD transfer of title would even make it legal for one of the children to move into the residence and live there, while refusing to sell the residence.
2. A TOD beneficiary designation often does not cover contingencies. What happens if the named beneficiary predeceases the owner? We might expect that a parent will change their TOD beneficiary designations if a child predeceases them; however, what if the parent is mentally incapacitated, or simply does not take care of it? There is no simple procedure for determining who the successor beneficiaries are for purposes of providing clear title to the real estate. In the event a predeceased beneficiary’s minor children become the successor beneficiaries, real estate cannot be transferred to them without cumbersome court proceedings, such as a guardianship. Going forward, the court would be involved in all transactions involving the real estate, including sale. Furthermore, there is no ability to hold assets for the minor beneficiaries once they become the age of 18.
3. If a TOD beneficiary is in a nursing home and receiving Medical Assistance (Medicaid) benefits, the automatic transfer of real estate to them will affect their Medicaid eligibility and, in all likelihood, cause a loss of benefits. Their proceeds from the sale of the property will likely have to be used to pay nursing home expenses.
Consideration of whether or not to use direct beneficiary designations is crucial to your estate plan. While it may work well in some situations, it is important to consider both the advantages and disadvantages and work closely with your estate planning attorney to avoid common pitfalls. When in doubt, seek proper legal advice before completing direct beneficiary forms to make sure your designations are consistent with your overall estate planning goals.