A client asked this week whether and when he should use the bank’s offered beneficiary form for his investment account. While this might seem like an easy question, the answer is “it depends.” Filling out a beneficiary designation form can change your entire estate plan. Therefore, you should not do it without discussion with your financial planner and estate planning attorney.
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Bank personnel do not have the legal training to inform you of the importance of this decision. They are willing and eager to suggest you add others to your account, and may encourage you to do so “to avoid probate.”
Most people do not realize that the bank forms will override what your will provides. If you add one of your kids as a beneficiary, or make the account “pay on death” to them, by operation of law those assets will vest in them when you die. You may have accidentally left out your other intended heirs at least with regard to that account.
After death, a will can only control the distributions of assets that: (1) you hold in your name alone, and (2) have no payable on death designations. Meanwhile, a trust can only control assets titled in the trust’s name or payable on death to the trust. This means that your will or trust may state that you want your estate distributed evenly among your three children. But if your IRA or life insurance beneficiary form says that everything goes to one child, that child will inherit that entire asset, and the other two will be left out. In the same way, a “pay on death” designation overrides whatever plan you intended with your will or trust.
We had one client who wanted to avoid probate, and left everything to their oldest child. This lady told me that “he will share it with his siblings fairly.” I warned her that he was under no legal obligation to share the money. If he chose to, he would need to consider gift taxes or at least file a gift tax return for transferring the large sums to his brother and sister. And what if he had creditors, such as a bankruptcy or a divorce proceeding? It would take time to figure out how much his creditors could claim from these assets.
Another client had four large investments accounts, one each payable on death to one of her children. When she developed dementia, she needed long term care in a memory care facility. Her children had to figure out a way to pay the large monthly fees while keeping the four accounts roughly even in amount.
Another thing often not considered: the death of a child. What happens if your account “pays on death” to your son, but he pre-deceases you? You might have wished that asset go down to his kids, but unless you added that to the “pay on death” form, they could be cut out.
Overall, it is better to consider your estate as a large single pie to be divided after your death. Your will or your trust can spell out percentages and provide for back-ups in case the primary heirs die before you. Do not be afraid of probate! It does not mean the State of Florida takes your money (except for a few hundred dollars for the filing fee.) It does not usually drag out for years unless there are valid will challenges.
At Burzynski Elder Law, we have experienced attorneys and legal staff to help you make sure your documents are current and comprehensive. We can make sure to address your family situation and your wishes. If you need more information, call us at 239-434-8557 or visit our website at www.burzynskilaw.com.