Utilizing Uncommon Beneficiary Designations

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Utilizing Uncommon Beneficiary Designations

When you die, anything that you own which has titling is either given to your beneficiaries via your will or via a will substitute. Any titled asset which does not have a will substitute goes into probate, the legal court proceedings by which your will is read and your assets are retitled in the name of the beneficiaries declared in your will.

If you die without a will (also known as intestate) and without will substitutes, then the court decides who your beneficiaries are. Most commonly, the Virginia court will select your spouse, children, parent(s), or sibling(s) in that order to be your beneficiary(ies), but it varies based on state and circumstances.

Probate has fees and taxes associated with it and can be a long and frustrating process for your beneficiaries and executor. For this reason, it is the goal of most estate planning to avoid probate. The only way to do that is to pass every asset via a will substitute or a trust.

Trusts can be established and your assets placed into them while you are living. In the trust instrument, you can declare what happens to the trust assets at your death, effectively placing beneficiary designations on everything your trust owns. If your trust owns everything which has a title, this is one method of avoiding probate. However, the trust is technically a separate entity from you and can add accounting complexities to your life from that fact.

Will substitutes sacrifice some of the customization of trusts but avoid the accounting complexities as well.

The most common will substitute is joint titling. Jointly-owned bank accounts or jointly-held titles are transferred by will substitute. When one owner dies, the other owner(s) assume the decedent’s control of the asset. This joint ownership is established either on account open or when you file your car, house, or other title.

For married couples, the most common joint ownership types are Joint Tenants with Rights of Survivorship and Joint Tenants by the Entirety. For both of these, when one tenant dies, the deceased is simply removed from the title and the surviving tenant maintains full control.

There are other kinds of plural-ownership accounts, but many are not will substitutes. Tenants in Common, for example, allows for each tenant to own a specific share of the assets. If one tenants dies, their share is an asset which must go through probate. The Tenants in Common titling does not function as a will substitute.

Another common will substitute is beneficiary designations. These are widely available and utilized on retirement accounts like IRAs and 401(k) accounts. These designations are very powerful and can accomplish anything you can imagine. Although the forms to designate your beneficiaries most commonly simply ask for a declaration of primary and contingent beneficiaries and their percentages, you can often write more complex wishes to accomplish anything you can imagine.

Although IRA beneficiary designations are among the will subtitutes with the most customization and power, other assets also allow simple forms of beneficiary designations.

Checking accounts allow for Payable on Death (POD) instructions while brokerage accounts allow for Transfer on Death (TOD) instructions to name one person to inherit the assets in the account. In both cases, the named beneficiary gains ownership of the account’s assets at your death. To set up these designations, simply contact your bank or brokerage firm and ask to put them on. Putting these designations on an existing account is normally free of charge.

Similarly, if you own real estate, you can establish a Transfer-on-Death deed, which is a beneficiary designation for your property. Virginia law has an optional form written into the code to establish this designation. You can simply fill out and sign the form before a notary. Then, file the form at the clerk’s office of the circuit court in the jurisdiction where the property is located. There is often a filing fee for this deed.

Furthermore, in Virginia, you can place a beneficiary designation on your vehicles. Using Form VSA 18 Beneficiary Transaction Request, you can designate one beneficiary to own your vehicle – be it a car, motorcycle, or other registered transportation – after you die. You submit this form at the DMV and filing it costs $10.

For many of these designations, institutions require that they only be placed on single-owner titles. Their argument is that jointly titled assets will be owned by the surviving owner, so the designation will not take effect. Others institutions allow for designations in addition to the joint ownership as a contingency plan and correctly only implement the designation only if both tenants die. For the best results, ask your institution for what they allow.

Also, all of these designations should be revocable, which means that you are allowed to change your mind and either remove the beneficiary designation or replace it with new instructions. Be sure to check with your institution on how you can remove the designation should you change your mind.

Some of these designations will allow you to name your trust instrument, which allows you to combine uses of probate-avoiding strategies. Using a Transfer-On-Death instruction, for example, to place your asset into a trust which can then govern distributing to beneficiaries is a small accounting effort which can be used to avoid the larger complexities of probate. You may find it easier to change the wishes of your trust than update your beneficiary designations with each institution.

The main danger of any of these beneficiary designations is that you will later change your mind and forget to update the designations. Will substitutes take affect before your will is ever read. And because will substitutes take priority and override your will, they should be selected carefully. If you believe your wishes will frequently change, it is often better to utilize a will and make your beneficiaries go through probate than it is to accidentally disinherit someone you love because your will substitute designations got in the way of your estate plan.

That being said, if you have confidence that your wishes will remain the same for many years, these beneficiary designations are often easier and cleaner for beneficiaries to inherit. Just be sure to keep good documentation of the designations so that your beneficiaries can easily find all of the assets they should claim.

Photo used here under Flickr Creative Commons.

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818…)