Using Beneficiary Designations to Avoid Probate

Estate planners have a variety of probate-avoidance tools at their disposal. One of these is beneficiary or payable on death (POD) designations. Beneficiary and POD designations allow you to determine who will benefit from life insurance contracts, retirement plans (including pension-sharing, profit, and 401(k) plans), and IRAs at your death. Beneficiary and POD designations avoid probate because they are contractual obligations that are not governed by the terms of your will. Because the designated assets pass to the designated beneficiaries outside of your will, there is no need to probate the will in order to validate the transfer of these assets. If, for example, you have designated a beneficiary of your life insurance policy, there is no need for the probate court to validate the transfer to the beneficiary because you have already expressed your desires in the insurance contract. Beneficiary and POD designations are easy to create. You simply name someone on the ownership documents (such as registration card for a bank account) as the designated beneficiary. At your death, the beneficiary will take title to the designated assets.Beneficiary designations can be preferable to certain other probate avoidance techniques, such as joint ownership, because they allow you to retain full control of the designated assets, often including the right to name a new beneficiary, prior to your death. Your beneficiary has no access to the assets during your lifetime, avoiding the risk that an ungrateful beneficiary will attempt to seize control of the assets prior to your death.Many states allow the designation of “payable on death” (POD) beneficiaries of banking, savings and loan, and other financial accounts. You may change the POD designations at any time and name alternate beneficiaries in case you are predeceased by a beneficiary. Beneficiary designations can be a better alternative to joint tenancies for some financial accounts because they do not subject the property to the intended beneficiary’s immediate control. However, beneficiary designations are only available for certain type of assets, such as financial accounts. For example, beneficiary designations cannot effectively dispose of real estate and many other types of assets. This limits the benefit of beneficiary designations in your overall estate plan. It is important to note that although these devises may avoid probate costs, they do not avoid estate and inheritance taxes simply because they avoid probate. This is because your taxable estate does not always coincide with your probate estate. For example, life insurance proceeds will generally be included in your estate if you possess “incidents of ownership” on the policies within three years of your death, even though such policies are nonprobate assets. It is important to consult with a qualified estate and trust attorney to determine the best strategy for accomplishing your overall estate planning goals.

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