What is a beneficiary designation?
Essentially, it’s a way to transfer certain assets to specific people upon your death without those assets having to go through probate. Most people are familiar with this concept in the form of life insurance (i.e., when the insured party dies, the beneficiaries get a payout). However, there are a number of other valuable assets besides insurance that can be transferred using the same basic concept. Keep in mind that these designations do have drawbacks and limitations (some of which are discussed below), but they can certainly be helpful for basic, short-term planning.
Here’s how these designations work: you (as the owner of the asset) name someone as the beneficiary of that asset. In most cases, once you pass, the person you’ve named simply needs to present a copy of your death certificate to the appropriate entity and title will be transferred from your name into that person’s name.
Some of the most overlooked assets that can be transferred this way include banking and investment accounts (using a “pay on death” beneficiary designation), vehicles (using a “transfer on death” or “TOD” designation on the vehicle’s title) and real estate (using a “beneficiary deed”). By making these designations, the named party can take ownership of the property much more quickly than otherwise might happen through probate.
As mentioned above, there are some risks and drawbacks concerning beneficiary designations. For example, if you name a sibling as the beneficiary of your automobile and that sibling predeceases you, your car will likely be required to go through probate upon your passing. Or, if you have a minor child designated as a beneficiary of your real estate and you pass before that child reaches 18 years of age, the property cannot legally be owned by a minor. Or if a husband is named as a beneficiary of a bank account and the wife neglects to update that designation after a divorce, the ex-husband still is legally entitled to take all the money from that account upon her passing. Situations like this happen more frequently than most people realize.
All that said, these designations can often work well with other legal documents (such as a will or trust) to quickly, and affordably, transfer your assets to those you care about. However, it’s always wise to consult with an estate planning attorney in conjunction with utilizing beneficiary designations to ensure that your long-term desires are accomplished effectively and with the lowest risk possible.
If you'd like to learn more about beneficiary designations or any other aspect of estate planning, we invite you to contact us with any questions you may have.