Benefit: Reduce or Eliminate the Time and Cost of Probate

Adding or updating beneficiary designations is one of the easiest estate planning tools available. In an effort to reduce or eliminate the time and cost of probate, clients can add beneficiary designations to checking accounts, savings accounts, brokerage accounts, and other such accounts using forms provided by the Administrator of that account (i.e., the bank or brokerage firm).

When we look at a client’s overall estate plan, we separate assets into three categories:

  1. Sole and Individual Assets
  2. Jointly-owned Assets
  3. Beneficiary Designation Assets

Life insurance policies and retirement accounts are typical examples of beneficiary designation assets. By contrast, bank accounts can be either sole and individual assets or jointly-owned assets. The problem with sole assets and joint assets are that they may require probate administration upon the death of the client, or upon the death of the joint owner. By adding beneficiary designations to assets that allow for them, clients can reduce or eliminate the time and cost of probate, resulting in a larger distribution of assets to future generations.

Burden: Lack of Flexibility

While beneficiary designations are incredibly useful to the overall plan, clients should not rely completely on beneficiary designations without also examining the potential risks involved. Because of the ease of adding beneficiary designations to accounts, clients too often do not consult their trusted advisors before making the designations. One risk is the lack of flexibility of this technique. Beneficiary designations provide no control over how the assets are distributed, nor do they allow the client to direct how those assets should be used once they are distributed. This is challenging particularly when the named beneficiary is a minor, or has other special financial, physical or emotional considerations.

Burden: Lack of Protection

Not only do beneficiary designations not allow clients to provide guidance for the beneficiary, but they do not allow for protection of the beneficiary, either. For example, if a client names a beneficiary who is going through a divorce or bankruptcy, the assets may slip through the beneficiary’s fingers and straight into the hands of the soon-to-be ex-spouse or the beneficiary’s creditors. Even when divorce or bankruptcy is not looming, the same risk occurs through daily activities, such as driving a car. Once the assets are in the hands of the beneficiary, they can be subject to claims by creditors for any number of reasons.

Burden: Risk of Uncertainty

Understandably, clients want simplicity in their plans, but that desire for simplicity can come at the risk of uncertainty. The ease of adding beneficiary designations to accounts can cause clients to engage in “promise planning,” wherein they name one single beneficiary as the recipient of the account with the expectation that the named beneficiary will distribute the assets to other loved ones based on promises made during life. Just as beneficiaries face the risks of bankruptcy and divorce jeopardizing their use and enjoyment of inherited assets, “promise planning” risks the use and enjoyment of those assets for every intended beneficiary. Because the named beneficiary has no legal obligation to fulfill a promise made during the client’s lifetime, if that beneficiary chooses not to distribute the assets further, the omitted intended beneficiaries have no legal recourse. Additionally, even in cases where the named beneficiary otherwise would want to fulfill the promise, that beneficiary may not be able to if he or she is subject to the risks discussed above, such as divorce, bankruptcy or litigation.

Only One Tool In The Advisor’s Toolbox

While beneficiary designations are necessary for a complete, functional estate plan, very rarely can they be used exclusively in fulfilling all the client’s intentions. Beneficiary designations are simply one tool in the toolbox of the trusted advisor. Although the hammer receives much use in the construction of a house, a house can not be constructed using a hammer alone. Beneficiary designations, like hammers, are important, but are best utilized together with all the tools available.

This content is provided for our clients, advisors, friends and other interested readers for informational purposes only. The contents of this article do not constitute legal advice and do not necessarily reflect the opinions of the firm or any of its attorneys or clients. This article provides general information, which may or may not be correct, complete or current at the time of reading. The content is not intended to be used as a substitute for specific legal advice or opinions. No recipients of content from this article should act or refrain from acting on the basis of content of the article without seeking appropriate legal advice or other professional counseling. The author expressly disclaims all liability relating to actions taken or not taken based on any or all contents of the article.