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March 13, 2024 at 02:26 PM
What You Need to Know
- Advisors who think a will controls the disposition of all assets at death are making a big mistake.
- Probate assets, owned in the decedent's name, are passed through the will; other assets may go directly to the named beneficiaries.
- Advisors and BDs must take care to ensure that e-signatures are genuine.
Many people believe that a will controls the disposition of all of one’s assets at death. This is not so.
For entities that serve as asset custodians, such as banks, brokerage houses and insurance companies, it’s crucial to understand the difference between probate and non-probate assets — and the role that beneficiary designations play in how assets pass at death.
- Probate assets are owned solely in the decedent’s name and are controlled and distributed according to the terms of the will. These assets must go through the surrogate’s court process for supervision, approval and distribution.
- Non-probate assets are those that pass outside the will. They bypass the court process and go directly to beneficiaries. Examples of non-probate assets are those held with joint tenancy, property held in a trust, retirement accounts with named beneficiaries and life insurance proceeds to a designated beneficiary who is not the decedent or the decedent’s estate.
Beneficiary designations have significant legal implications, for both the individual completing the designation forms and the financial advisor. As a result, it is imperative that individuals receive independent and professional advice from an estate planning attorney, and that financial institutions take steps to make sure that intended beneficiaries are designated and updated correctly.
Here are four considerations around beneficiary designations to help advisors ensure authentication.
1. Proper titling of assets is crucial.
A will controls assets in an individual’s name but not those with joint owners or controlled by beneficiary designation. Joint accounts and beneficiary designations supersede the will and often pass directly to the surviving joint owner or beneficiary even if the will directs otherwise.
For example, testamentary trusts are generally established so assets do not pass outright to such beneficiaries as minors, those receiving government benefits, spouses with children from a prior relationship and mentally incapacitated individuals. Therefore, to ensure that assets are distributed to the testamentary trust or as intended under the will, the advisor must identify how the accounts are titled and how the account will pass at death.
2. Be aware of default beneficiaries.
It is common for individuals to name their spouse or children as beneficiaries of a life insurance policy. As with the testamentary trust example, under the governing instrument, a policy might default to a spouse or children if a contingent beneficiary is not named. This could circumvent the will’s provisions and cause assets to pass to an unintended recipient.
3. Blended families need special planning.
Blended families have a higher risk of estate disputes and litigation, underscoring the issues associated with beneficiary designations. If one or both partners in a second marriage have children from a prior relationship, an individual’s will typically establishes a lifetime trust for the surviving spouse. At the death of the surviving spouse, the remaining trust assets would revert to the children of the first decedent.
However, conflicts can arise if the surviving spouse is the designated beneficiary of the first decedent’s life insurance policy or individual retirement account because the death benefit would be paid outright to the surviving spouse or the surviving spouse would inherit the IRA, potentially excluding the first decedent’s children from receiving the assets.
