Beneficiary designations are commonly used tools in the estate planning process. Many of your assets, including your bank accounts, retirement accounts, and life insurance policies, can pass outside of your estate through a beneficiary designation. This means that, rather than being controlled by a will at your death, the asset will pass to your designated beneficiary automatically. We call these “non-probate assets,” since they do not need to be probated (or go through the judicial process) for title to transfer. Many people establish a beneficiary designation when they open or create the account.
That raises the question, if all your bank accounts, retirement accounts, and life insurance policies have beneficiary designations, do you still need an estate plan? The short answer is, yes. But there are several reasons why an estate plan is still essential for you.
Consider Your Most Valuable Asset
One of the most obvious reasons is that your house is not controlled by a beneficiary designation. If you own a house it is critical that you plan for its disposition after your death. For many, their house is their most valuable asset, and thus warrants the most consideration when creating an estate plan. While real estate can pass to another person outside of probate, this process is accomplished by deed, not beneficiary designation. And drafting a deed is significantly more complex than adding a beneficiary designation on a bank account. An experienced estate planning attorney will consider how your house is titled and offer you options to best accomplish your estate planning goals.
Your Beneficiary Could Predecease You
As mentioned above, beneficiary designations are powerful tools and are often utilized by attorneys in the estate planning process. But beneficiary designations alone are insufficient protections to ensure your money is transferred according to your wishes. Estate planning is often about erecting safeguards for “what if?” scenarios. Here, we may ask, what if your beneficiary predeceases you or dies simultaneously with you? Often, people designate their spouse as the beneficiary on their bank accounts, retirement accounts, and life insurance policy. In some situations, a spouse dies before the account holder and the account holder forgets or is unable to update the designation before their death. In other cases, a spouse has passed away, tragically or even naturally, within a short period of time after the other. In these situations, if no contingent beneficiary is named, the asset becomes a probate asset. And if you do not have an estate plan, state law will determine how your assets are distributed.
Many institutions offer the ability to designate a “contingent beneficiary”—or a beneficiary who takes the asset if the first named beneficiary is unable. This mitigates some of the risk outlined above, but there are still limitations to this tool. For most people, the intended distribution of their assets is first to their spouse if living, and second, to their children if the spouse is not living. Here is where many contingency designations fall short. Typically, the institution that services your account will have a robust list of rules surrounding your beneficiary designations. And often, one of the rules is that you may not name more than one beneficiary at a time. So, even if you wish to leave your bank account to your children equally upon your death, a beneficiary designation will only allow you to select one child to receive the proceeds. An estate plan, on the other hand, offers extreme flexibility for you to choose to whom and how your property is distributed.
Other Assets Not Controlled By Beneficiary Designations
We’ve considered your house, bank accounts, retirement accounts, and life insurance policies. But these are not all of your assets that an estate plan controls. You may consider two other categories of assets: your vehicles and tangible personal property.
In North Carolina, you are unable to have a beneficiary or “transfer on death” provision on your vehicle title. This means that if you would like to control who receives your vehicle at your death, you need to create an estate plan that controls personal property such as a vehicles. In doing this, you can also avoid potential problems with your vehicle being stuck in probate without an easy method for your heirs to sell the vehicle. The simplest way to dispose of the vehicle is to address it in your estate plan.
The other category is tangible personal property: think of your jewelry, tools, or family heirlooms. Many people choose to use their will as a mechanism to give certain items to people as keepsakes or tokens of gratitude. Careful planning in this area can also reduce intra-family conflict after your death. Sometimes items with the greatest sentimental value can be the subject of the most severe intra-family conflict if your heirs cannot agree on whether to sell the item or who gets to keep it. The best way to resolve these issues is to plan for them before they occur. You may give an item explicitly to a single person; and you may include whatever precatory or sentimental wishes you desire along with the gift. This can put the rest of your family at ease, knowing that your wishes were properly carried out.
The Other Benefits of An Estate Plan
So far, we have assumed that your beneficiary designations have been applied correctly. But, as previously mentioned, many institutional servicers have a robust list of requirements for establishing and changing your beneficiary designations. If any of the beneficiary designations fail, then the account is treated as if it had no designation at all. This is where a “residuary clause” in a will comes in. The residuary clause addresses any of your assets that you have not otherwise distributed or planned for, and it provides instructions for how you would like to distribute them. This provides a safeguard that catches any asset that may have been forgotten or inadequately planned for.
There are countless other advantages offered by a will or trust that you could never achieve with a simple beneficiary designation. In your will, you can select the individual designated to administer your estate. Without such an appointment, the court is permitted to determine the person best suited for this job, guided by a list of statutory priority. If you have minor children, you can appoint a guardian for your children in the case that you and your child’s parent die. If you would like to have greater control over your assets, such as delaying delivery of your assets or delivering them in installments, protecting assets from creditors or taxation, granting privacy over what assets are distributed and to whom, and a host of other functions, then a trust may be able to provide you with numerous benefits.
In conclusion, an estate plan can benefit you in a number of ways, even if you have beneficiary designations on your accounts. Just as every person is different, every estate plan should be tailored to fit your unique needs and goals. A custom estate plan is not only for a select few, but can be available to anyone who would like to promote continued family harmony, provide a smooth succession of wealth, and solve future problems. At Pinna, Johnston & Burwell P.A., we have been crafting custom estate plans for decades, and we would be happy to help you with yours.
