Your Estate Plan: Ideas You Can Really Use

The Use (and Misuse) of Beneficiary Designations as Part of Your Estate Plan

By Earl H. Cohen, Attorney at Law

Welcome to the next installment of Your Estate Plan, a monthly series of articles on estate planning and planned charitable giving. This series of articles will present practical information and ideas you can really use, regardless of your age or the size of your estate, in planning and keeping your estate and charitable giving plans up to date. Future topics will include "Living Trust and Powers of Attorney" and "Advance Health Care Directives."

Last month we discussed the most common estate planning techniques and tools: wills; trusts; powers of attorney; advance health directives; retirement plans; lifetime gifting to individuals; charitable gifting; insurance planning including property, casualty, liability, health, disability, life and long term care coverage; liability limiting; tax pass through entities; and business continuation and succession agreements.

The proper use of beneficiary designations is the eleventh topic in our arsenal of estate planning techniques and tools.

Beneficiary designations involve naming an individual, a trust, a for-profit entity or a charitable organization as the beneficiary of your life insurance, annuity or retirement plan. Another form of beneficiary designation involves providing for the account or asset to be transferred or payable on the death of the owner to a named beneficiary. These are commonly known as TOD (transfer on death) or POD (payable on death) designations and can be used for bank or other financial accounts. Similarly, joint tenancy asset registration can be used for bank or other financial accounts, as well as real estate and other assets that are registered, such as automobile titles. Unlike TOD or POD, joint tenancy in some cases actually confers ownership on the new joint tenant once the registration is complete. Conferring those rights of ownership should not be taken lightly.

Use of beneficiary designations, TOD, POD and joint tenancy have become attractive since those assets with beneficiary designations normally do not require probate administration. And, confirming the transfer of the asset to the beneficiary may be as simple as providing the bank or other financial institution with a copy of the decedent's death certificate.

Creating the beneficiary designation may be simple, but it must be done correctly to avoid unintended results. For a beneficiary designation to be valid it must normally be in writing, filed with and accepted by the insurance carrier or other financial institution. Most importantly, you should insist on confirmation that the change has been accepted and made on the insurance carrier's (or financial institution's) official records. Without that confirmation, you have no certainty where the assets will pass on your death.

If this process is so simple, why don't we all just name beneficiaries for all of our assets to simplify planning and avoid probate? This is where the rules of "unintended consequences" and "too much of a good thing" come into play. If all of your assets are payable to beneficiaries, how will funeral, last illness, tax and administration expenses be covered? Expecting your beneficiaries to contribute to these costs may not be realistic in many cases. Most importantly, for many estates, excessive use of beneficiary designations without very careful planning may cause the estate to be subject to higher estate and income taxes.

Naming a charity as the beneficiary of life insurance, retirement or other financial accounts may provide significant tax and non-tax benefits for estates, large or small. Combined with the use of charitable remainder trusts and/or charitable lead trusts, may provide long-term benefits for you and your family members while at the same time leaving a lasting financial legacy.

While a full discussion of the issues and techniques surrounding beneficiary designations is beyond the scope of this article, feel free to contact us for easy to understand monographs.

Watch for next month's article, "The Use of Living Trusts as Part of Your Estate Plan."

For further information on how these and other estate planning techniques may apply to your situation or your charitable planned giving strategy, feel free to call me at 800-4016-194.