Colorado Probate Blog - Wade Ash Woods Hill & Farley, P.C.

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Beneficiary Designations May be Dangerous to Your Estate Plan

Traditionally, the central document in an estate plan was a will or revocable trust. For many people, that continues to be true, but it is now possible to pass almost any kind of property outside the terms of your will. For example, this can be done by adding the beneficiary as a joint owner on a bank account, by naming the beneficiary as a “pay on death” (POD) or “transfer on death” (TOD) payee on a stock or securities account, or by signing a “beneficiary deed” that names a beneficiary to become the owner of real estate when you die. Colorado recently added automobiles to the list of assets that can pass by a TOD beneficiary designation. These arrangements, which I refer to generically as “beneficiary designations” can be useful, but they can also seriously disrupt a careful estate plan if they are done without care and appropriate advice.

Well-meaning financial advisors, bank employees, and others often recommend naming a beneficiary for an account or asset. Unfortunately, those people unusually have no understanding of the client’s overall estate plan, and simply filling in the name of a beneficiary on an account form or beneficiary designation form may undermine the planning that went into the client’s will or revocable trust. A recent Kiplinger article on the “biggest estate-planning mistakes people make” included not naming a POD or TOD beneficiary for every account a client owns. The rationale was that naming a beneficiary avoids the “expensive” probate process. Probate is still expensive and time-consuming in some states, but Colorado has one of the best and most efficient probate systems in the country. In Colorado, probate is not something to be feared and, in fact, it is the probate process that ensures that, when you die, your wishes will be carried out.

Assume, for example, that a client has a will or revocable trust that leaves everything, after the client and the client’s spouse have died, to a trust for the couple’s three children. Based on discussions between the couple and their lawyer, the trust will save taxes, protect the children from creditor claims and from the claims of an ex-spouse if a child divorces, and will provide professional management of the trust property. The next time the couple visits their investment advisor, the advisor tells them they need to name a TOD beneficiary for their multi-million dollar investment account, so the couple fill out a form to name the three children as TOD beneficiaries of the account. That simple act destroys all the benefits of the trust that the lawyer drafted, because now the account will pass outright to the children rather than to the trust. Worse yet, the couple might designate only one of the children as the TOD payee, assuming that the child will share the account with the siblings, but the clients don’t realize that doing so will create tax problems for the child who is named as beneficiary. Or worse yet, the child named as beneficiary may decide that mom and dad really did want him or her to have all of the investment account to the exclusion of the siblings.

When considered carefully and integrated with a client’s overall estate plan, beneficiary designations can be useful. For example, if they had consulted their lawyer, the clients in our example might have been advised to name as TOD payee of the account not the children but the trust for the children. But when signed haphazardly and without appropriate advice from the client’s estate planning lawyer, beneficiary designations can be disastrous. Before signing a beneficiary designation for an account or asset, it’s best to consult with your estate planning lawyer to confirm that a beneficiary designation should be made and, if so, that the designation is worded properly to coordinate with your overall estate plan.

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