Avoiding Probate with Beneficiary Designations
In part two of this series, we examined joint ownership, and here we will examine beneficiary designations as a means of transferring property upon death and a way to avoid probate. For eligible assets, beneficiary designations may be an effective way to avoid probate. In contrast to joint ownership, beneficiary designations allow you to avoid probate without giving anyone access to your assets during your life. Beneficiary designations also avoid the potential gift tax issues accompanying the establishment of joint ownership.
Bank accounts and investment accounts, including retirement accounts, usually allow for you to name one or more beneficiaries to inherit the account at your death. For bank accounts, they are called “pay-on-death” (POD) designations and for investment accounts, they are called “transfer-on-death” (TOD) designations. For estate planning purposes, POD and TOD designations are essentially the same thing.
Assets passing via POD or TOD designation are not probate property. And since the transfer does not occur until your death, there are no gift tax consequences. While naming POD or TOD beneficiaries is often an easy arrangement to make with your financial institution, it is recommended to review the designations with your estate planning attorney to ensure the designations work with your overall estate plan.
For example, in North Carolina, minors (under the age of 18) cannot legally inherit property in their own name. Thus, if you have consulted with an estate planning attorney and set up a descendants’ trust for your minor children, then you should name the trustee of the trust as the designated beneficiary, not the actual child. If you name your minor child, then a guardian must be approved and bonded by the court to hold on to the account until the child turns 18. A quick consult with the attorney who put together your estate plan can avoid this potential issue.
An estate planning attorney is a great resource to answer any questions you may with regarding what will happen to your property when you die. If you do not currently have an estate plan or would like to have an attorney review your current estate plan, you should schedule an appointment to meet with an attorney.