If you have an Individual Retirement Account (IRA) or 401k account, you are probably aware that you can designate a beneficiary to receive the account when you die. This is because usually you are asked to fill out beneficiary designation forms almost as soon as you open the account.
You may or may not also be aware that you can do the same thing with your bank and brokerage accounts. The reason you may not know this is banks and brokers are not as diligent about getting people to fill out their designation forms. You usually have to ask them for the forms.
In some states you can also designate a death beneficiary for automobiles. Some states that come to mind that have this are California and Colorado.
In some states you can also designate a death beneficiary for real estate! Some states that come to mind that have this are Arizona and California.
All of these beneficiary designations are revocable, meaning you can change the death beneficiaries any time you want. There will be paperwork involved and in some cases also filing and recording fees, but it can be done.
In addition to being revocable, another advantage of using death beneficiary designations as an estate planning technique is it avoids probate which is, in case you are not tired of reading this by now, expensive, time-consuming and public.
By now you must be wondering why, given these advantages (revocable, avoids probate, relatively inexpensive), is Nina Whitehurst putting these in the category of "DIY Estate Planning Mistakes". Please allow me to explain.
Plenty of my clients use these techniques in addition to their will and their trust(s). They have their place in estate planning as long is the choice is made in an intentional, conscious, educated, and informed manner. The problem is too many people don't think it all the way through, if they think about it at all, usually because they are not aware that they SHOULD think it through better. They don't know what the alternatives are or what questions they should be asking.
So here goes:
FAILURE TO COORDINATE
DIY-ers often do not understand what happens if the beneficiary designation says one thing and the will says another. I see examples of this all of the time. The classic case is the parent that names a child as executor under her will, which leaves everything to the children in equal shares (usually, but not always), and, therefore (according to the DIY-er's thinking) names that same child (the child named as executor) as the death beneficiary of the DIY-er's many accounts. Obviously the DIY-er has assumed, without consulting an attorney, that the executor will be duty-bound to divide up all of those accounts among his siblings.
But wait. Maybe the DIY-er actually intended to make a gift of all of those accounts to the executor-child and only divide up everything else among the children. So how are we to know?
Well, the law supplies the answer, and the law says the death beneficiary designations trump the will, meaning the executor-child gets to keep 100% of everything he inherited by beneficiary designation. He doesn't have to share. And so, he doesn't. And so one of the siblings posts this question on an online ask-a-lawyer forum (having inherited the DIY gene) and I respond that the death beneficiary designation controls unless you can prove that your parent intended to leave the accounts to that particular child in a constructive trust to be shared among the children. Only there is no trust agreement, so good luck with that. Usually there is no solid evidence so all those other children are disinherited. All except the one, who keeps everything for himself. There's a right way and wrong way to do this. That is the wrong way.
FAILURE TO NAME CONTINGENT BENEFICIARIES
What happens if you name someone as your death beneficiary and that person predeceases you? Does his estate inherit or does it go back to your estate? Well, it goes to the next beneficiary in line, if you named a contingent beneficiary. If you did not name a contingent beneficiary (this happens a lot), then the answer does depend a little on how the designation is worded and the rules of the particular account, but the point is, the account could easily end up in the hands of someone you did not intend. If you named your son but your son predeceases you, it could end up on the hands of his wife. Hopefully you and his wife were close and you would have approved. Maybe you would have preferred that it go directly to his children. A proper estate plan anticipates this possibility. A beneficiary designation may not.
ESTATE BALANCING ISSUES
I have seen some people devise an "estate plan" whereby a different death beneficiary is named for each of several accounts maintained by the DIY-er, with the intention at the time of equalizing the distributions that way. The obvious problem with this is over time the accounts get out of balance, to the point of effectively disinheriting some heir(s) unintentionally. And if you want to change the percentages, it gets complicated as well, requiring much more bookkeeping work than one wants to do in later years. And what happens if you name an agent/attorney in fact later to help you with your finances and you forget to share with him your plan design? Guaranteed he will methodically drain one account at a time just to make things simpler, or maybe consolidate the accounts all into one up front. And now the whole plan is ruined, unintentionally. This can be avoided with proper planning.
TRANSFER ON DEATH (TOD) DEEDS FOR REAL ESTATE
The issues with TOD deeds are too many to list here in this blog post. I will probably do a separate blog post later, but allow me to highlight just one here: The title obtained under a TOD deed is not immediately marketable. This is because of laws that allow creditors of the decedent to reach real estate that was owned by the decedent at death, sometimes for quite long periods of time after death. You might find that you cannot sell the property for several years (sometimes longer than a probate would have taken) because you are unable to obtain title insurance for your buyer. Like I wrote earlier, there is a place for TOD deeds in estate planning, but the totality of the circumstances must be considered. Usually there is a better way.
And here's another HUGE issue. You probably gave the agent under your power of attorney the power to sell real estate. If your agent (attorney in fact) under your durable power of attorney is not the beneficiary of your transfer on death death (or any other beneficiary designation) but he is the beneficiary under your will, then he or she has a huge incentive to sell the real estate to convert it to cash (that will pass under the will) or to close or liquidate the bank account for which he or she is not the designated beneficiary. A clever but nefarious end around. Do not make the mistake of thinking that your angel (adult child) would never do that. People become surprisingly greedy when money in involved.