Beneficiary Designations and other Non-Probate Transfers
Probate is a legal process by which a will is administered. In former days, a will was essential to pass property to the rightful heirs at the owner’s death. Over the years, it has become possible to transfer even large amounts of property at the owner’s death without necessity of a will and without using a revocable trust. These transfers are called nonprobate transfers and have become a critical aspect of estate planning. This article mentions some of the key points in transferring certain property at death using non-probate transfers.
Beneficiary Designations Trump Wills and Trusts.
It is critical to realize that when a beneficiary designation is made in proper form, it will control who will receive the property, despite contrary language in a will or a trust. For example, if a person states in his will that a beneficiary will receive his inheritance in the form of a protective trust, this provision will fail with respect to any assets which have a beneficiary designation, because such assets are not controlled by a will. An account held in the decedent’s name with a beneficiary designation to an individual will also not be controlled by a pour-over will and so will avoid the provisions of a trust. A trust, however, can itself be made the beneficiary of an account.
Workplace retirement accounts such as 401(k) plans and individual retirement accounts such as IRAs may contain beneficiary designations. In the case of workplace plans, but not IRAs, federal law requires that the spouse of the plan participant be named the beneficiary unless the spouse waives this right in writing. A single account can be left to several beneficiaries and in unequal amounts. For example, a beneficiary designation may provide that upon the death of the plan participant the balance of the plan will pass 30% to A, 15% to B and 55% to C. IRA beneficiaries also have special options. A spouse beneficiary may elect to treat the decedent’s IRA as his/her own IRA, with the ability to name new beneficiaries. A non-spouse beneficiary has the choice of cashing in the IRA and paying the deferred tax, or taking the IRA intact as an inherited IRA. A trust may be named as a beneficiary, but in this case special rules apply which affect the ability of the spouse to roll over the balance or other trust beneficiaries to treat the account as inherited.
Finally, a retirement account which names no beneficiary will become an asset of the decedent’s estate and will generally have to be completely withdrawn within 5 years of the decedent’s death.
Bank and Brokerage Accounts.
The account holder on these accounts will usually be able to designate a beneficiary through a transferon- death (TOD) or pay-on-death (POD) designation. These designations will operate to pass the account balance to the beneficiaries named. They will pass outright to the beneficiaries free of trust. If a beneficiary is a minor and the amount to pass is more than $10,000 a special protective arrangement will need to be established. Sometimes account holders will add a son or daughter’s name on an account as a co-owner in order to allow the co-owner to access the funds in the event of the account holder’s disability. This has several drawbacks. First, the account may become subject to claims by creditors of the son or daughter, or become an object of contention in a divorce. Second, the account will pass entirely to the co-owner at the
account holder’s death, which may not be the desire of the account holder.
Life Insurance Policies.
Beneficiary designations for life insurance policies operate much the same way as POD designations on bank accounts, but they have more flexibility depending upon the options the policy allows the beneficiary to choose. Once again, the death benefit will pass directly to the beneficiaries, and will not be governed by the terms of a will or trust. A policy can name a trust as beneficiary or no beneficiary at all, resulting in the death benefit becoming an asset of the owner or the owner’s estate.
Real property in Arizona can pass to designated beneficiaries if the owner or owners record a beneficiary deed. Such a deed gives the beneficiary or beneficiaries ownership at the death of the current owner but does not give the beneficiary any rights with respect to the property before then; nor can the creditors of a beneficiary make any claim against the property while the current owner is alive. A beneficiary deed may be changed or revoked at will by the property owner and becomes void if the property owner sells the property.
Arizona law allows the owner of a vehicle to name a successor upon his or her death, but only if the total assets in the decedent’s probate estate (not including assets passing by non-probate transfer) do not exceed $50,000. Forms to accomplish this are available on the Arizona Department of Transportation’s web site.
Under Arizona law, the recipients of non-probate transfers are liable to the decedent’s probate estate for claims of creditors and statutory allowances to the decedent’s spouse and children to the extent the probate estate is insufficient. This includes trust beneficiaries. If the trustee of the decedent’s trust has already distributed assets to beneficiaries, those beneficiaries are liable to creditors of the decedent to the extent of their inheritance.
Bob Ciancola is an attorney in Scottsdale practicing in estate planning and probate, tax law and business transactions. He may be reached at 480 991-0803 or by email to firstname.lastname@example.org.