Naming a Beneficiary Will Help Bypass Probate Court
A proper beneficiary designation supersedes the terms of a will or a trust. A designated beneficiary collects the asset upon the owner’s death by submitting the required documentation to the account holder. The assets do not have to go through probate court.
The named beneficiary can be a person (i.e., family member or friend), charity/non-profit organization, or a trust. With some assets, you can designate primary and secondary beneficiaries. The primary beneficiary(ies) inherit first if they survive you. If the primary beneficiary does not survive you, your assets would instead go to any secondary (a.k.a. contingent) beneficiary(ies) if they survive you.
Assets That May Require Designation
- Retirement Accounts - It is important to name beneficiaries on annuities, and retirement accounts such as 401(k)s, 403(b)s, IRA, SEP IRAs, pension, and profit-sharing plans. An individual who is properly designated as a beneficiary of a retirement account may roll his or her share into an inherited IRA, which can avoid negative income tax consequences.
Life Insurance - You can name primary and secondary beneficiaries for life insurance proceeds.- Investment Accounts and Stocks - Brokerage accounts, mutual funds, individually held stocks, and other investment accounts made TOD (Transfer On Death) pass to the designated person without going through probate.
- Bank Accounts and CDs - You can make bank accounts and Certificates of Deposit (CDs) POD (Payable On Death) to beneficiaries.
- Real Estate - Ohio law permits you to name a beneficiary for real estate. Upon the death of the owner, the beneficiary simply files an affidavit and the owner’s death certificate with the county recorder to acquire title to the property. Not all states, however, allow you to name a beneficiary for real estate. For example, Kentucky does not allow for transfer on death deeds.
- Motor Vehicles - Ohio law allows you to name a beneficiary on your motor vehicles. However, Kentucky and other states do not allow a beneficiary designation on motor vehicles.
Advantages of Beneficiary Designations
- You simply complete a form and submit it to the financial institution to name a beneficiary, and can make changes to his/her beneficiaries in the future, as needed.
- Upon your death, the beneficiary can collect the asset directly from the financial institution without going through probate.
- During your life, the designated beneficiary has no control of the asset.
- During your life, the asset is not subject to any claims of the designated beneficiary's creditors (as it would be if the asset was titled jointly).
Disadvantages of Beneficiary Designations
- If a beneficiary predeceases you and you do not update your beneficiary form, the result may not be what you intended. For example, if a child predeceases you, you would likely want your deceased child’s share to pass to your deceased child’s children (i.e., grandchildren). Many beneficiary designation rules state that if a beneficiary is deceased, the asset is distributed to the surviving beneficiaries, and not the deceased beneficiary’s children. In contrast, with a will or trust, you can spell out exactly what happens if a beneficiary predeceases you and make sure it goes to the right place.
- You generally do not want to name a minor or a special needs person as a beneficiary of your assets. If a minor inherits an asset, a guardian may have to be appointed with the court to manage the assets until the beneficiary turns 18. Guardianship is time-consuming and expensive. Alternatively, if the asset passes via your will or trust, you can provide for the management of a minor’s assets without court involvement.
- You need to remember to review your beneficiary designations on a regular basis. If a beneficiary dies, goes into a nursing home, or your relationship with a beneficiary changes, you may want to update the beneficiaries to make sure the asset goes where you want it to go. People more often remember to “take someone out of the will” and forget to change beneficiary designations.
- If you have beneficiaries designated on all your assets, then you do not have any estate funds. Therefore, there are no funds from which to pay for funeral and burial/cremation, as well as your outstanding debts and expenses.
