Many of our clients add beneficiaries to their financial accounts so that the accounts will be directly distributed to the beneficiaries when the clients die. While beneficiary designations can be a cheap and easy way to avoid probate, there are pitfalls to this approach, such as:
1. Sometimes people who have several children designate one child as the beneficiary, imposing a moral obligation on that child to share the proceeds with the other children. What if the one beneficiary can’t or won’t share? What if that beneficiary is supposed to pay for your funeral, but doesn’t? What if the proceeds in the account create gift or income tax consequences for the beneficiary?
2. What if you designate all of your children as beneficiaries and one of your children dies? Do you know what happens to the deceased child’s share? I can’t give you an automatic answer because financial institutions differ on how they treat a predeceased beneficiary, and Ohio law does not resolve this issue. The form you completed controls what happens to the deceased child’s share. Do you know what that form says? Did you get a photocopy from the financial institution?
3. What if you completed beneficiary forms, you did not get a copy of the forms, and the bank lost the beneficiary forms? This has happened to several of our clients. The banks involved insisted that the accounts be probated instead of being paid to the alleged beneficiaries. ALWAYS insist upon getting copies of any beneficiary forms that you sign at any financial institution, and keep those copies with your estate planning documents. (My experience is that financial institutions do not give you copies of the forms unless you ask for them.)
4. What if you designated beneficiaries on all of your accounts, and none of the beneficiaries want to share in the costs of your funeral or your final bills? We have two of these cases in our office right now.
5. What if the financial institution did not properly complete the beneficiary forms, but you signed them? NEVER presume that accounts are properly set up. Ask your lawyer (one of us) to review this paperwork.
6. You have 4 certificates of deposit (CD) at a bank and 4 children. You designated one child as the beneficiary of each CD. Your agent under your power of attorney cashes one of your CDs to pay a bill for you. That child/beneficiary has just lost part of his or her inheritance.
I could go on and on with questions and reasons why your estate plan should not depend solely upon beneficiary designations. As your attorney, I much prefer that you have your accounts be distributed through your probate estate or revocable living trust…yes, I did say through probate, which is not worse than a root canal despite what you may read on Google.