· What is beneficiary-designation property?
While you may have title to certain assets in your individual name, the very nature of an asset may dictate to whom it will be transferred at your death. For example, certificates of deposit, individual retirement accounts, and life insurance contracts typically contain a beneficiary-designation clause, wherein you specify who will receive the asset or the proceeds at your death. While you retain legal and beneficial title to such an asset during your life, and thus can consume the asset or change the beneficiaries, by designating beneficiaries on the asset, you are, in essence, predetermining who will take legal and equitable title to that asset at your death. As such, your will, despite its provisions, will not control the asset.
· Is designating a beneficiary a good way to avoid probate?
A beneficiary designation directs the proceeds of life insurance policies, individual retirement accounts, and annuities to particular persons or entities without the need for probate in most situations. However, designating a beneficiary can lead to consequences other than probate avoidance. For example, your choice of beneficiary can have a tremendous tax consequence for the person to whom you intend to be generous! Failing to name the proper person on beneficiary designations can result in a requirement that money be paid out and taxed immediately, instead of over a much longer period. In addition, payment made directly to a person may leave your estate without funds to pay taxes or debts.
Beneficiary designations do not always guarantee the avoidance of probate or court-supervised administration. If you name your estate as a beneficiary, the proceeds will go through probate. If you name a minor as a beneficiary, a financial guardian may have to be appointed by the court to hold and invest the proceeds. Finally, if the beneficiary you name is mentally incompetent to take the property, a financial guardian will have to be appointed.
Naming a beneficiary is something that should be considered care-fully and should be accompanied by expert advice.
· Can life insurance policies and proceeds become living or death probate assets?
We usually think of life insurance policies as nonprobate assets. This is because a life insurance contract is a third-party beneficiary contract. Upon the death of the insured, the policy proceeds are payable by the life insurance company to the beneficiary. Probate courts usually have no jurisdiction over nonprobate assets such as life insurance, living trust assets, jointly owned assets, and retirement death benefits.
There are a number of ways, however, that your life insurance policies and the proceeds can get caught up in either a living probate or a death probate, or both. Let’s explore the ways this can occur:
You fail to name a beneficiary or a contingent beneficiary. If you fail to name a beneficiary on your life insurance policy or if the beneficiary you have named fails to survive you, the insurance company will pay the proceeds to your probate estate. Most policies provide that the insured’s probate estate is the final backup, or default, beneficiary when there is no named living beneficiary.
Your named beneficiary survives you, but dies shortly thereafter. Suppose you and your spouse were involved in an auto accident and you died instantly but your spouse died several days, hours, or even minutes later. If your spouse is named as the beneficiary on your life insurance, the insurance company will pay the proceeds of your policy to your spouse’s probate estate. Since your spouse did survive you, your contingent beneficiaries are not eligible to receive your insurance proceeds.
Your beneficiary or contingent beneficiary is under a legal incapacity such as minority or incompetence. If your insurance proceeds are payable to a minor or to an incompetent adult (such as a brain-damaged or comatose spouse who survived the disaster that killed you), the insurance company will have to pay the proceeds to a court-appointed guardian of the minor or of the incompetent adult until he or she gains or regains legal capacity.
You become legally incapacitated, and a guardian of your estate is appointed to take control of all your assets including your cash-value and term life insurance. If you lose your mental capacity or become physically incapacitated due to age, illness, or injury, the probate court may have to appoint a guardian to take control of your assets to conserve your estate from the claims of creditors and other possible losses.
If you own cash-value life insurance, your policy will come under the control of the probate court. The life insurance company will not allow your spouse or anyone else to have access to your cash value, even if it is for your benefit, unless or until your spouse or someone else is appointed by the probate court as the conservator of your estate. Furthermore, once appointed, the conservator will have to get the probate court’s permission to withdraw the cash value from the policy, plus post a bond for the amount withdrawn.
Both cash-value life insurance and term insurance carry with them very valuable policy rights which can be exercised only by an owner who is competent. If you become incapacitated, you will not be able to exercise any of these rights, such as your right to convert your term insurance to cash-value life insurance. Approximately 98 percent of all term life insurance never pays off because the policy lapses for nonpayment of premium, the term expires, or the policy is converted to cash-value life insurance. If your insurance policy lapsed or if the term of your term insurance policy expired, an insurance company would declare you uninsurable for purposes of acquiring any new life insurance on your life. If you become incapacitated, only a probate court—appointed guardian can exercise your policy rights for you, and you will have no say over how these policy rights will be exercised.
· May I leave all my lift insurance benefits to my spouse?
Many assets, such as insurance policies, individual retirement accounts, qualified retirement plans, and some bank accounts, require a beneficiary designation. ‘When you die, these assets will be paid directly to the person you have named as your beneficiary, without having to go through probate. At least that is the way it is supposed to work.
Spouses often need help and guidance when their marriage partners pass away. Grief, confusion, and lethargy all take their toll during the period of bereavement. By leaving property outright to a surviving spouse through a beneficiary designation, you have no opportunity to provide him or her with guidance and assistance in managing the money. Often, an outright distribution creates more, not fewer, problems after the death of a spouse. At the death of one spouse, the survivor is an easy target for children, relatives, or unscrupulous people who want something. Leaving property outright makes it easier for those predators to feast.
If your spouse is disabled when you die, the court will probably take control of the funds. If your spouse dies before you, or you both die at the same time, the assets will have to go through probate so that the court can determine who will receive them.
Many people want to control how their property is to be used after they pass away. Leaving property outright to a spouse affords absolutely no control. If, for example, the surviving spouse remarries, there is no assurance that any property he or she received will ever pass to the deceased spouse’s children. Or if the surviving spouse has creditor problems, any property left outright to that spouse is fair game for creditors. If control of your property or creditor planning is important to you, leaving property outright to your spouse is a mistake.
What is a POD bank account?
A payable-on-death (POD) designation is sometimes placed on bank accounts to direct that, at the owner’s death, the proceeds are to be paid to a specific individual or entity.
· What is a TOD account?
A transfer-on-death (TOD) designation is sometimes placed on broker-age accounts. TODs accomplish the same results as PODs but for different types of accounts.
· Can POD and TOD accounts avoid probate?
POD and TOD accounts do avoid death probate. But they do nothing to avoid living probate. That is, if you are legally incapacitated, no one can touch either type of account without a court order or a specially drafted durable power of attorney.
· Can’t I simply designate my estate as beneficiary of my certificates of deposit, individual retirement accounts, and life insurance policies and then have my will control them?
If you name your estate as the beneficiary of these assets, your will can indeed control them. Doing this, however, does have pitfalls and generally should be avoided. By making your estate the beneficiary of these assets, you are subjecting otherwise probate-free assets to the jurisdiction and lengthy process of the probate court. In addition, these assets may be free from the claims of creditors when paid to a beneficiary other than your estate, but if your estate is the beneficiary, creditors may very well have access to these assets.