“I was talking with my friend and she said I had to have a Will in order to avoid probate.” This is a common misconception. In fact, if there is a Will in place when you pass away, then you are likely going to be subject to probate as a Will is instructions for probate. The usual follow-up question to the above statement is “well, how do I avoid probate then?” Outside of setting up a Trust, one of the easiest ways to avoid probate is through direct beneficiary designations. Almost all assets can be transferred by a beneficiary designation – life insurance policies, 401(k) accounts, bank accounts, IRA accounts, business interests and even real estate.
Financial institutions often refer to beneficiary designations as a transfer on death (TOD) or payable on death (POD) beneficiary designation. You can set the TOD or POD up with your financial institution by filling out a simple form which they can provide to you. Beneficiaries can include anyone such as your spouse, to your children, to friends, to charities. Once a beneficiary is named, the asset passes directly to the beneficiary outside of the terms of any will or trust – unless the trust is named as the beneficiary.
You can transfer real estate via a Transfer on Death Deed (TODD). A transfer on death deed operates much like a beneficiary designation for real estate. It is an actual deed, recorded in the county records which specifies who will inherit title to the property upon your death. It does not transfer any interest in the property during your life so the property may be sold in the discretion of the owner. The transfer on death designation may be removed or changed at any time during the owner’s life.
It is important to keep your beneficiary designations up to date. As I mentioned above, assets with a beneficiary designation pass outside of the terms of your will. This means if you have strict instructions in your will as to the age your children are to receive their inheritance (i.e. a portion at age 25, 30, and 35) those instructions will not be followed for accounts or assets with a beneficiary designation. Instead, the money will be distributed outright to the beneficiary. Additionally, it is important to update your beneficiary designations whenever a major life event happens – divorce from a named beneficiary, death of a named beneficiary, or birth of new family members that could or should be a beneficiary.
While beneficiary designations play a vital role in the overall estate planning process, it’s important to recognize that they alone should not be considered an entire estate plan. Beneficiary designations do not provide the owner or the beneficiary protection in the instance of incapacity. For this reason, it’s important to discuss with a qualified estate planning attorney the utility of other legal documents, such as a will, revocable trust, powers of attorney, or health care directive as part of an overall more comprehensive estate plan.