Beneficiary Designations & Estate Planning
Proper beneficiary designations are an essential part of a thorough estate plan. Keeping these designations up to date is critical to help ensure that your assets are distributed as you intend after your death.
Having incorrect beneficiary designations can cause a host of problems, such as:
- Your assets going to unintended beneficiaries, such as a former spouse or creditors
- Losing the tax and asset protection benefits of any trusts that you have built into your estate plan
- Losing income tax deferral benefits on your IRA and qualified plan accounts
How Assets Pass After the Death of the Owner
There are a number of ways that your assets can pass after your death:
By beneficiary designation.
Assets subject to a beneficiary designation are governed by contract law instead of estate law. They will pass directly to designated beneficiaries upon the death of the owner. The owner’s Will or other estate planning documents will not control assets with beneficiary designations, unless the owner’s estate or trust is the named beneficiary.
It should be noted that some assets can only pass by beneficiary designation at death, including IRAs, Qualified Retirement Plan accounts, life insurance and annuities. In addition, some other assets may pass by beneficiary designation, which is known as Paid on Death (POD) or Transfer on Death (TOD) designations, and include other financial accounts (such as checking and brokerage accounts), financial assets (such as CDs), and in some states, including Georgia, real estate.
By automatic transfer to a surviving joint tenant. Depending on the state where the asset is located, several forms of joint ownership may be available:
- Joint tenancy with rights of survivorship (such owners are sometimes simply referred to as “joint tenants”)
- Tenancy in common
- Tenancy by the entirety
Assets owned by two or more owners as joint tenants with rights of survivorship will transfer automatically to the surviving joint owner or owners at the death of one of the joint tenants. However, assets owned by two or more owners as tenants in common will not transfer automatically at the death of an owner; instead, the deceased owner’s share in that asset will become part of that owner’s estate at that owner’s death. Tenancy by the entirety is available only to married couples in a small number of states, including Florida. This form of joint ownership is not available in Georgia. Tenancy by the entirety is equivalent to owning assets as joint tenants with rights of survivorship, but it also comes with some extra asset protection features.
By the terms of a trust.
If assets are owned by the Trustee of a trust upon the owner’s death, the trust’s terms will control what happens to those assets.
By the terms of a Will
. Any assets that don’t pass automatically by beneficiary designation or to a surviving joint tenant, and that are not owned by a trust, will become part of the deceased owner’s probate estate. If that deceased person had a valid Will at the person’s death, then the terms of the Will control how those probate estate assets are distributed. However, before any assets can be transferred, a probate proceeding will need to be opened in the probate court of the county in which the deceased person was domiciled at that person’s death, and an Executor will need to be appointed by that court before the probate estate assets can be transferred to the beneficiaries listed in the Will. If the deceased person owned real estate (real property) in a state other than the one in which the person was domiciled at death, then an ancillary probate proceeding may need to be initiated in that other state in order to deal with the real estate in that other state.
By the intestacy laws of the state where the deceased owner was domiciled at the owner’s death.
If a deceased person does not have a valid Will in place at the time of the person’s death, then the intestacy laws of the state in which the deceased person was domiciled at the person’s death will control what happens to any probate estate assets located in that state. For real estate owned in other states, the intestacy laws of those states, not the state of domicile, will apply. Intestacy laws generally determine who will be the deceased person’s heirs. Heirs are generally the closest living relatives of the deceased person, as determined under state law rules of kinship. Intestacy law also determines how much of a deceased person’s probate estate goes to which heirs. For instance, under Georgia intestacy law, if a deceased person who has no valid Will is survived by a spouse and children, the spouse and children will each share the probate estate assets equally, except that the surviving spouse will receive at least one-third of that property, with the rest of the property shared equally among the children. If a child is deceased but has children who survive the deceased person (the “decedent”), then the children of that deceased child will share that deceased child’s share equally. This is called a “per stirpes” distribution.
Year’s Support and Forced or Elective Shares
Most states have laws that protect a decedent’s surviving spouse and minor children. In Georgia, a surviving spouse and any minor children may be awarded assets from the probate estate in the amount needed to support them for up to one year after the decedent’s death. This is referred to as a claim for “year’s support.” For this purpose, Georgia law considers anyone under the age of 18 years to be a minor.
Some states provide that the spouse, and sometimes the children, are entitled to a specific minimum share of the estate, also known as forced or elective shares. In this context, “forced” means that estate planning may not fully be able to eliminate that right, and “elective” means that the spouse or child holding the right can elect to take it regardless of the provisions made or not made for that person in the estate plan.
A year’s support claim is needs based and is near the top of the estate’s priority payments, including coming before the claims of the estate’s general creditors. The only claims having priority over year’s support include secured creditors to the extent of their security interest, such as mortgages and car loans. Federal taxes often, but not always, also take priority over a year’s support claim.
While a year’s support and forced shares are entitlements under state law, in many cases it is possible to structure an estate plan in a way that limits or eliminates the potential that these rights will be exercised.
Deciding on Asset Ownership and Beneficiary Designations
When deciding how to own or title your assets and how to set up beneficiary designations, consider the following factors:
- How will you make sure that the plan set out in your estate planning documents (your Will and or trusts) will be funded?
- How will you ensure there is enough liquidity in your assets to enable the plan to be carried out more smoothly?
- What are the tax benefits or drawbacks of various plans?
- What, if any, asset protection benefits does a given plan provide? It may be wise to explore the advantages of a revocable living trust.
- How does the plan deal with the risk of a future divorce, either your own divorce or that of an intended beneficiary, such as a child?
These decisions are not always easy to make, since different estate plans offer different benefits and drawbacks. However, the key is to consciously consider those factors and decide what is right for you and your family. The estate planning attorneys of Morgan & DiSalvo, P.C. can explain the various options and help to clarify those difficult decisions. Contact us at (678) 720-0750 to schedule a complimentary estate planning consultation. We look forward to hearing from you.
