In this segment of my three part overview of what assets do not pass through probate, I will discuss the second broad category of assets that do not go through the probate process: assets that have a beneficiary designation.
There are some assets that allow you to designate a beneficiary. Those assets commonly include IRAs, insurance policies, retirement plans, and some bank accounts. Generally, when a person dies the assets are paid out to the designated beneficiary without probate. The designated beneficiary simply contacts the institution, provides the required documents, and the institution distributes the assets to the designated beneficiary.
Unfortunately, it does not always work that way. Below are a few examples of when the beneficiary designation may fail.
- Minors: Most institutions do not want to incur the possible legal liabilities of distributing the assets of the beneficiary designation to a minor. Therefore, many institutions insist on establishing a guardianship for the minor.
- Death of beneficiary: If the beneficiary dies before or at the same time as you (and there is no other designated secondary beneficiary), the proceeds of the beneficiary designation will be considered part of your estate and those proceeds will go through probate.
- Incapacitation of beneficiary: If the beneficiary is incapacitated, the court will generally establish a guardianship/conservatorship. An institution will not knowingly distribute the assets to an incompetent person and will usually require court supervision.
It is also important to note that a beneficiary designation trumps your Will. If you designate your brother as the beneficiary of your life insurance policy, he will receive the benefits under that policy if he is alive until you change it. It does not matter if you have gotten married, had children, and left everything to your wife in your Will including the life insurance policy. It does not matter if you have not spoken to your brother in ten years. The life insurance company will follow your beneficiary designation and pay the funds to your brother. Beneficiary designations do not follow your Will.
At a minimum, you should review your beneficiary designations at every major life change and then follow up with the institution to make sure it is correct. Sometimes a change in designation is incomplete or gets lost in the mail. Then, the institution goes by the last official beneficiary designation. For more information about beneficiary designations, avoiding probate, and protecting your unique family situation, please call and schedule a meeting with us.