Beneficiary designations are simple ways of transferring title to your assets (or insurance policies) upon death. Most people love them because they usually involve nothing more than signing a form. There is no need for an attorney.
Beneficiary designations are not in the same legal category as a will. Therefore, they do not require witnesses. Instead, they are business contracts. Because they are contracts, all that is required is a signature.
The contract will say that upon your death, the title shall transfer to this other person. The other party to the contract (the bank, the insurance company, etc) agrees to transfer the title.
Sounds great, right? Not so fast.
While beneficiary designations are useful – and better than nothing – I want to open your eyes to some of the pitfalls in relying solely on these types of designations.
Why Relying on Beneficiary Designations Can Put Your Family in Court in Oklahoma
Most people love Beneficiary designations because they avoid probate court. We’ve explained before the reasons to avoid probate. Why put your family through a court-centered legal process when you die just so they can inherit your assets? Most don’t know it can be avoided altogether.
Those that do realize probate should be avoided will consider setting up an estate solely using these types of beneficiary designations. Joint tenancy deeds and joint tenancy bank accounts. Pay on death designations to the bank. Life insurance with a beneficiary designation that names the spouse or child. While these are a good start, they leave many gaps, and can still put a family through court.
Individuals not named will have to go to court
Let’s say a husband names his wife as a beneficiary of his life insurance policy. If she dies in a car accident with him, her estate will inherit the life insurance. Her heirs will have to go to court to obtain those proceeds.
If this husband and wife had minor children, the minor children will rightfully inherit the life insurance, but they will have to go through court.
If minors are named beneficiaries, the Court must get involved
Let’s take this same scenario, and tweak it. Assume that the husband named his wife as the beneficiary, and his two children as secondary beneficiaries. Then the husband and wife die simultaneously.
If the children are adults, they can make a claim on the policy and receive the life insurance proceeds. However, if the children have not yet reached the age of 18, they will not be able to obtain the proceeds. Instead, the children will have to go to court. But it’s not that simple.
First, a guardian for the children must be appointed. This requires its own set of legal proceedings and hearings. This process is delayed and prolonged if the parents did not have estate planning documents related to guardianship nominations.
Next, the guardian will have to interplead the life insurance money into the court. The court will then set up a trust for the children to inherit the money.
Last, when the children turn 18, they will be able to petition the court to release the money.
When you think about it, that is a lot of legal work to simple obtain life insurance proceeds. Perhaps worse, is the fact that 18-year olds will inherit a large amount of money in one lump sum. Not paid out over time. Not monitored.
And of course, because this involved the court, it is all public record. While life insurance is a non-public, private matter that typically avoids probate, in this instance it became public throught the guardianship and probate proceedings.
A simple estate plan can avoid all of these downsides.
Combine beneficiary designations with legal estate planning to get the best of both
We can still use beneficiary designation forms to avoid court. But we need to integrate them into a more comprehensive plan, one that predicts and provides solutions to these worst-case scenarios.
In our planning sessions, we go over these scenarios with clients, and we explain how to designate life insurance policies, retirement accounts, 401k plans, real estate, limited liability companies and other types of assets.
The purpose of planning is to protect your family; to ensure they don’t have to go to court during an already stressful time. Most importantly, to ensure they get access to money and support when they need it.
Design a customized plan for your family with Oklahoma City Estate Planning Attorney
If you are interested in meeting with our attorney to design a plan for your family, contact our office.