Estate Planning also Includes Designating Beneficiaries

Posted By : admin
Category : Estate Planning
17 - Oct - 2014

Any estate plan should include a will, powers of attorney and a living will.  Some estate plans may include a trust or multiple trusts.  However, even if you meet with an attorney and do all of the right things to plan for the future and to avoid probate, forgetting to designate a beneficiary may toss you right back into a probate situation.

Lets back up.  What does probate mean?  Probating a will is the process through which an estate is opened in the county courthouse for the purpose of dividing the property of a person who has passed away pursuant to their will (assuming the deceased person had a will).  You will often hear that people are trying to avoid the probate process by having an attorney draft a trust document.  One of the many reasons that a person may use a trust to avoid probate is because there can be significant costs in opening a probate estate in your county court.  The largest of the expenses, of course, are attorney fees.  Most people would prefer that their money be passed along to their family members after they pass away instead of to a law firm.  As a result, they will set up a trust, which can allow much of their property to pass to whomever they wish without the opening of a probate estate.

Sounds simple enough, right?  You are thinking you need a trust because a trust document will avoid probate and allow your family to obtain more of the money you have worked hard to earn.  Whether or not you need a trust can only be determined on a case by case basis and is outside of the scope of this blog.  However, assuming that you are a good candidate for a trust, even the most well-drafted trust in the world will not save your heirs from the probate process if you don’t make sure to title assets correctly and name appropriate designated beneficiaries on assets that will be held outside the trust.

Are you thoroughly confused now?  Let me try to explain.  Your IRA, life insurance policies, bank account(s) should all have beneficiary designations unless the account is owned by your trust.  A beneficiary designation allow you to choose who will get your money when you die.  If you do not choose a person or entity (such as your trust, child, etc.) as a beneficiary to these accounts then when you die your money will be paid to your estate.  In Indiana, if you have less than $50,000.00 as a part of your estate then you can execute what is called a small estate affidavit to transfer your property and avoid the cost of probate.  However, if your estate is more than $50,000.00 because you designated your estate as the beneficiary of your life insurance policy, for example, then your family will need to pay an attorney to open an estate so that the money from the life insurance policy can be passed out.

In an attempt to illustrate, pretend that John is a single man living in Noblesville, Indiana.  John is 64 and owns a home worth $240,000, has $100,000.00 in a bank account, owns a 2012 Honda Accord outright and has a term life insurance policy for $400,000.00 payable to his 2 children (32 and 34 years old) in equal shares at the time of his passing.  John met with an estate planning attorney who prepared a trust and will for John prior to his passing.  The law firm transferred title to the Honda Accord to the trust.  The law firm also prepared a deed with a transfer on death designation and filed it in the Hamilton County Recorder’s Office.  At the direction of his attorney, John went to his bank and designated that his children be designated to receive his funds in equal shares if he were to pass.  If John passed away the next week his family would not need to open a probate estate in order to pass out his assets to his adult children.  The Honda will be transferred via the trust.  The bank account, life insurance, and house will be transferred as a matter of law.  Therefore, no estate is necessary to transfer any of John’s assets.

However, if we change the example above slightly there is an entirely different outcome.  Lets change the fact pattern so that John owns his home, but has not worked with an attorney to prepare and file a deed with a transfer on death designation to transfer the house to his trust (or outright to his children) upon his passing.  If there is no transfer on death designation (or a previously executed and recorded deed transfer to the trust) then John’s house will be owned by John’s estate at the time of his passing.  Since John’s house is worth well more than $50,000.00, a small estate affidavit cannot be used to transfer this asset to his children.  It will be necessary to open a probate estate, notify John’s creditors through the probate estate, create an estate inventory and accounting, open an estate bank account, file a tax return for the estate, etc.  You get the picture.  There are many steps to the administration of a probate estate.  The attorney is going to have to spend quite a bit of time working on the case in order to transfer the house to John’s children, and time is money.

Halcomb Singler, LLP, cannot stress enough that this blog should not be used as a roadmap to prepare your own estate plan.  Every person’s situation is completely different from the next.  Greg Halcomb practices in the area of estate planning and estate administration to craft estate plans customized to that couple or individual.  Whether it be basic estate planning, planning to avoid federal estate tax and/or business succession planning, Halcomb Singler, LLP, is here to assist.  While not every person’s estate planning needs are complex, we believe that every person should meet with an estate planning attorney to determine how to best craft a plan for his or her situation.  If you would like to meet with Greg Halcomb about putting together an estate plan or to change your existing estate plan please call (317) 575-8222 or click here.