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Using Beneficiary Designations to Avoid Probate

When it comes to estate planning, the primary goal of most clients is to eliminate the need for probate.  Although a jack of all trades, probate is primarily a court proceeding designed to lawfully transfer certain assets previously owned by a deceased person.  Probate is by no means a terrible undertaking, but it can be costly and time consuming.  The good news is that not all assets need pass through probate.

Under Florida law, financial accounts with a “pay on death” designation transfer to a named beneficiary and do not require court intervention. The “pay on death” designation has become increasingly popular as it is easy to establish and results in a timely, inexpensive transfer of wealth.  The designated beneficiary also has no present interest in the account which means they cannot access the funds while the owner is still living. 

Although beneficiary designations are a wonderful tool, there can be some unintended negative results within the context of a broader estate plan. 

First, accounts owners will often designate a single beneficiary with the expectation that said recipient will turn around and then distribute the asset(s) to their siblings or other family members.  This can result in an unintended gift tax consequence for the initial recipient and can lead to the funds being intercepted if the named beneficiary has creditors or is going through a divorce proceeding.  There also exists a scenario under which the named beneficiary may not be inclined to follow unwritten instructions regarding subsequent distributions.

The second common mistake is that account owners fail to understand that beneficiary designations trump instructions set forth within a trust or last will and testament.  If a last will and testament says to divide all assets among three children, yet an account is pay on death to the eldest, the eldest child will receive the entire account.  This can be the genesis of litigation and deep emotional wounds within a family.

To be clear, beneficiary designations are not bad and can serve a much-needed purpose no matter the size of one’s estate.  That said, there is both wisdom and financial benefit in consulting with an experienced estate planning attorney to ensure this helpful tool is utilized properly.