Problems with Beneficiary Designations

Most people are familiar with using beneficiary designations on things like IRAs and life insurance policies. Some may have put a payable on death (POD) or transfer on death (TOD) beneficiary on their bank accounts, or added a child to the account as a joint owner. While this may seem like a good plan, there are pros and cons to beneficiary designations. Here are some things to know when considering beneficiary designations:

The main purpose of any of the above strategies is usually to keep those accounts out of Probate and give the beneficiary quick and easy access to the money. However, there could be unintended consequences for doing so. 

Mom and dad have a simple will, but…

One common situation I have seen many times over is mom and dad have a simple will that says their children are to inherit their estate in equal percentages. Then years later, usually after one spouse has passed away, the surviving spouse adds a child to their accounts to help with managing their day-to-day affairs. When everyone reads the will after that spouse passes away, they still see that everything is supposed to be divided evenly; but, because the accounts were “joint accounts,” the child whose name is on those accounts now owns them one hundred percent. 

The child in this scenario whose name is on the accounts is generally not legally required to divide that money with anyone. Further, because they now own the account, if they do distribute an amount that is above the gift tax exemption, they must then file a gift tax return on that distribution and will likely be required to pay the gift tax. You can imagine the problems that could stem from this complicated beneficiary designation scenario.

Family has different types of assets…

Another common scenario is a family who has different types of assets. For example, let’s say mom and dad own a nice piece of land and have stocks and bank accounts. They want their estate to be divided evenly among their two children. 

They decide to do a will leaving the land to one child and they put the other child on their financial accounts as a beneficiary. At the time they do this the value of the land is basically equal to the amount of money they have in the bank and in investments. Fast forward many years down the road and the land has greatly appreciated while their cash assets have been drawn down substantially to pay for their care. When they eventually pass away the child getting the land ends up receiving much more than the child who receives the cash assets. This is not what they intended and can cause major rifts in families following the loss of a parent.

Let an estate planning attorney handle your beneficiary designations

As a lawyer, these are just two types of situations I have seen firsthand play out. I’ve seen the sibling who decided not to share the account and I’ve seen families fall apart because the proper planning was not done. 

All of these situations can be avoided with the proper planning. You need to sit down with an estate planning attorney who will be thorough and ask you the right questions so that your wishes are carried out. There are other strategies to avoid probate and give your beneficiaries quick access to funds. 

Call Tapp Law Firm, LLC to schedule a free consultation so that we can create a legal plan together to accomplish all of your estate planning goals 843-350-1792