In the latest Weekly Wright Report:
Beneficiary Designations and Estate Planning
Beneficiary designations play an important role in the transfer of assets after your death. They can be confusing and disastrous if mishandled.
After death, assets that are not jointly owned and that do not have a beneficiary designation are required to be administered by the Orphans’ Court and Register of Wills Office in Maryland. While this process is streamlined, it is a public record, the assets are subject to creditors, and it takes time and expense. If you have a last will and testament, the court follows your instructions contained within the last will and testament. If you do not have a will, the State where you die has rules governing how your probate assets will be distributed.
The benefit of a proper beneficiary designation is that it transfers the asset to the surviving beneficiary almost immediately with only a death certificate and possibly a form to fill out. For example, a life insurance policy will require a completed application and a death certificate to transfer the death benefit to the beneficiary. The proceeds of the life insurance policy avoid the probate process but do not avoid estate taxes.
Life insurance policies, pension plans, Individual Retirement Accounts (IRAs) and annuities commonly have beneficiary designations. Also, certificates of deposit (CDs), checking and savings accounts may have beneficiary designations which are sometimes referred to as POD (Pay on Death) or TOD (Transfer on Death). Brokerage accounts and mutual fund accounts may also have beneficiary designations. In Maryland, automobiles may have a beneficiary designation. Even personal residences may have beneficiaries named in the deed.
While naming a beneficiary on an account avoids probate, it also supersedes any planning done under your last will and testament. You may have a last will and testament that leaves everything equally among your children and their families, but only the children named as beneficiaries will receive a share of the asset. You should be very sure that the beneficiary designation is properly worded. For example, it is sometimes difficult to get a financial institution to accept a beneficiary designation that provides for a share of the assets to be transferred to a predeceased child’s children. If not properly worded you could disinherit your grandchildren.
You should periodically check to make sure your financial institution is listing the correct beneficiary. People frequently fail to update their beneficiary designations after a divorce or the death of a beneficiary. Also, financial institutions frequently merge and lose records. You might be very sure that you named a beneficiary when you opened the account, but after three mergers and twenty-five years, no records can be located at the financial institution.
Another problem is naming a minor as a beneficiary of an asset. Children or grandchildren under the age of 18 cannot own assets. In this case, the court will require a guardian to manage the asset until the child turns 18 and the court will require annual accountings. If you are concerned about a child or grandchild managing assets at age 18, you can name an adult as a custodian for the minor child under the Maryland Uniform Transfers to Minors Act and stipulate that the account is managed by the adult until the beneficiary is 21 years of age. The adult can expend the assets for the child in any way the adult deems appropriate but at 21 any remaining value will be turned over to the child or grandchild. Assets held under the Maryland Uniform Transfers to Minors Act do not require annual court accountings.
Beneficiary designations can be very useful but they must be carefully monitored and integrated with your overall estate planning.
If you require assistance with prepare an estate plan or updating a current plan, the lawyers at Wright, Constable & Skeen LLP are here to help you. If you need help or wish to discuss further, please contact me.