Using Beneficiaries in Your Estate Plan
Creative ways to use beneficiary designations avoid probate or reduce will contests.
Beneficiaries in Real EstateMany states now provide the ability to add a pay on death beneficiary designation on real estate. In some states such as Texas there are additional benefits such as recovery protection from Medicaid long-term care charges and probate avoidance.
In most states the creation of a pay on death deed or a beneficiary deed is specifically authorized by statute and in some cases to obtain all of the benefits intended the language in process must follow the statute.
For example in Texas the pay on death deed must be actually signed by the individual owner, and cannot be executed with the power of attorney. It must also be filed in the deed records to become effective. Unlike other real estate conveyance documents which are effective when signed the Texas revocable pay on death deed requires recording to become effective.
There may also be some limitations under these deeds regarding who or how you can appoint beneficiaries. He would need to check your local state statute or an attorney who works in your area see what those limitations might be. For example, in Texas, any named beneficiaries have to take in equal shares. In other words if you name your three children as your pay on death beneficiary they have to get one third each. If you wanted to change the proportions you would have to utilize some additional documentation to get that to happen.
In a small estate or in estate with very limited assets such as a home these can be a very cost efficient way to secure the transfer of the home and avoid the probate process.
For Medicaid long-term care purposes the filing of a pay on death or beneficiary deed does not change the ownership of the property and therefore is not a transfer until the death of the parties. Therefore it would usually be exempted from the five-year gifting look back.
For tax purposes it is still considered a transfer which occurred because of a death in the recipients would continue to get the to step up in tax basis when they receive the property.
Other interesting uses of beneficiary designationsProviding special benefits to one or more of your beneficiaries can be accomplished by naming specific pay on death beneficiaries on specific bank accounts or assets such as a CD stock account. Your will will only cover what is known as probate property. Therefore accounts with specific beneficiaries will pass outside of your will and go directly to the individual named.
This allows your will to provide for equal shares to everyone and you to provide a benefit to one or another beneficiary separately outside state
This technique can also be used when you want to leave someone a benefit but you do not want to include them in your will they are not getting an equal share and you are concerned they will just disturb the process. For example I have an estranged child that I wish to leave some money but I don't want to put them into my will because I don't want them to complicate the probate process or interfere with my executor or other beneficiaries. I can put funds in a separate bank account or a separate certificate of deposit and name them as my pay on death beneficiary. That way on your death they would receive the money you would set aside for them but would not be considered a beneficiary under your will and therefore would not be entitled to all of the statutory notices and other probate requirements.
People are also not aware that they can in some cases do percentage beneficiaries such as on IRA or insurance policies. Most companies will allow percentage beneficiaries so that you can do proportional or adjusted shares based on how much you want to go to the individual person.
Beneficiaries are a simple way to manage your estate however some caution should be used if you are trying to make the beneficiary the minor child or incapacitated person. In the case of minor children if you name them as a beneficiary they may not receive the money until they attain the age of majority. If you have minors you would probably want to investigate the use of trusts or other means to provide a benefit for the child currently without having to make them wait.
Usually with minors grandparents for example want to provide the money so they can use it for school or other immediate needs. Therefore waiting until they turn 18 or 21 is sometimes counterproductive.
Beneficiaries are becoming more and more of an option for financial custodians. If you have a situation where adding a simple beneficiary may do the trick then you should ask your custodian if that is a possibility. The only other caution is that you need to be aware that the beneficiaries will override your will therefore property transfers via a beneficiary designation it never reaches your estate and therefore if your intent was to have it divided differently you would need to be aware of that.