Using Beneficiary Designations in Your Estate Plan

Couple using a tablet while going through paperwork

Your estate plan includes a last will and testament, and likely a living trust and powers of attorney. If your goal is to keep your assets out of probate and to provide for your children, you may be overlooking another tool for estate planning: beneficiary designations. Here's a guide to using beneficiary designations in your estate plan.

You probably have some assets with beneficiary designations already, such as life insurance policies. There are also other assets for which you can plan with beneficiary designations, and some documents, such as a divorce decree, that may require you to establish beneficiary designations on certain assets. By deliberately planning your beneficiary designations, you can ensure that your assets pass as you intend with a minimum of red tape.

Beneficiary Designations for Retirement Plans

If you are like many people, your retirement plans are some of your most significant assets. Most retirement plans, like 401(k)s and IRAs, pass through beneficiary designations, not through a will. If you have a 401(k), federal law says that your spouse is your beneficiary. Even so, it is advisable to name him or her as beneficiary on your company's official forms. A spouse can consent to having a trust or child named as beneficiary on a 401(k); if such a consent is signed, the law will uphold it.

If you are not legally married, but have a domestic partnership, be aware while that naming your partner as beneficiary could be used as evidence of your intention to solidify your relationship at some point if your partner ever tries to establish that you had a common law marriage, Ohio does not recognize common law marriage. This could, however, be relevant if you move to another state that does.

If you are a single parent, and name your child as beneficiary on a 401(k), be mindful of your estate planning goals if you remarry. Your marriage will mean that your new spouse will be your beneficiary. If this is not what you intend, speak to your estate planning attorney, and be aware that a prenuptial agreement may not be effective in changing this outcome (since your intended spouse will not actually be your spouse at the time the agreement is signed).

If you divorce, beneficiary designations for life insurance, most retirement plans, and some other assets may automatically be revoked. A recent Ohio Supreme Court case held that if the designation was in effect prior to the enactment of the law revoking a divorced spouse's beneficiary designation, the law does not automatically revoke the designation. ALWAYS update your beneficiary designations after any major life change, especially a marriage or divorce, rather than relying on the operation of law. A court may ultimately find in favor of the beneficiary you intend to receive the asset, but it could take costly litigation to achieve that result.

Transfer on Death and Payable on Death Designations

Certain assets can be designated transfer on death (TOD) or payable on death (POD). Assets with a title, such as a vehicle or watercraft, can be designated TOD under Ohio law. Other assets may be transferred at death using TOD designations, including securities. Ohio has a Uniform Transfer-on-Death Securities Registration Act that lets an individual (or multiple individuals with a right of survivorship) to designate a TOD beneficiary for securities. The state also recognizes similar TOD designations executed in other states. Securities include stocks and bonds, as well as business interests in a corporation or limited liability company.

TOD designations may also be used for real estate. An owner of real estate can record a designation affidavit naming one or more beneficiaries to the parcel of real estate. If multiple beneficiaries are named, and unless otherwise specified, they take the real estate as "tenants in common," meaning there is no right of survivorship between them; each person's interest in the property would pass to their own heirs or beneficiaries on their death.

"Payable on Death," or POD, designations, are generally used for bank accounts. POD accounts are similar to joint accounts with a right of survivorship in that they pass directly after the owner's death without the need for probate. However, a POD designation offers some advantages over a joint account. With a POD designation, unlike a joint account, the named beneficiary does not have access to the account until after the owner's death. By contrast, if you name a loved one as a joint owner of a bank account, they have full access to all funds in it, and the account could be drained by their creditors, even if the funds originated with you.

Trusts vs. Beneficiary Designations

Beneficiary designations can have utility in terms of keeping your assets out of probate, but they are far from foolproof. A better option to avoid probate and ensure that your intended beneficiaries receive your assets is a trust. Why?  When a beneficiary receives their inheritance through beneficiary designations, the beneficiary receives no protection that a properly drafted trust can provide.  This includes protections from divorce, lawsuits, creditors including bankruptcy creditors, and nursing homes and ensures that your assets will pass to the intended recipient upon your death. If you want a review of your existing designations to make sure they are in line with your goals, contact an experienced Ohio probate and estate planning attorney.

You may also be interested in: