It’s understandable that beneficiary designations seem like an excellent and easy estate planning tool. But from our experience, when someone actually dies, beneficiary designations are often bad news.
We’ll describe a few reasons why beneficiary designations cause problems in probate when estate plans become reality. Then you can decide for yourself if beneficiary designations are worth the risk.
Outdated beneficiary designations don’t reflect your wishes
Often, by the time a person dies, their beneficiary designations are way outdated and no longer reflect the wishes of the decedent. How do we know that the designations are outdated? The beneficiary designations clearly conflict with the will, trust, letter of last instructions, and last conversations.
Why? It is too easy to forget to update your beneficiary designations. It’s easy to download a beneficiary form from the bank website, sign, and return it. But, it’s very easy to forget to submit a change of beneficiary form when you make changes to your estate plan. For privacy reasons, the bank doesn’t list your beneficiaries when you get your statements. You have to remember to check if you’re not reminded on a regular basis.
During our annual reviews, we try our best to nudge our solo agers to keep their beneficiaries up to date (or remove them). My preference is to remove the beneficiary designations and let everything flow through the will.
What happens if there is not enough money in an estate?
Accounts with beneficiary designations are NOT part of the probate estate. This means that your Executor has no control over those funds. The money will go directly to your named beneficiary (who could be your girlfriend from decades ago that you forgot to remove…).
Too many accounts with named beneficiaries can result in a cash-poor estate. There are not enough funds to pay for estate expenses, court fees, appraisers, debts, or even for the heirs named in your will. Not having money to pay debts and creditors can cause more problems, because creditors may go after the heirs.
Even worse, there may not be any funds available to pay the beneficiaries named in your will, because the bank accounts went directly to the account beneficiaries. It will be sad for the heir in the will, since it wasn’t your intent to leave them with no inheritance.
Hard to know until probate has already begun
It creates an annoying catch-22. Meaning, banks/brokerages only reveal if there are named beneficiaries to the beneficiaries themselves or to a court-appointed executor. How do you know if probate is necessary if you don’t know whether there are any beneficiaries?
Your executor may waste time and money to set up probate, only to find out that there was no reason to probate because the accounts have named beneficiaries. It’s frustrating to tell the family that they paid us just to tell them that the account funds are going elsewhere.
Also, the banks do not reveal this information easily, even to the court-appointed executor. Sometimes executors still have to jump through hoops to get the banks to cooperate.
Solo Ager Book
Beneficiary designations seem great on paper, and I get it. But, time and again, we’ve seen how this does not end well in reality. Hopefully this prompts you to just take a look at all of your accounts sometime soon.
If you don’t have it already, click on the link to my book, “The Solo Ager Estate Plan,” for a free download.
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