Beneficiary Designated Property: A Trap for the Unwary

Pullman & Comley, LLC
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Pullman & Comley, LLC

Financial institutions and brokerage firms occasionally recommend that client accounts be structured as joint or beneficiary-designated accounts without full consideration of the impact on the client’s estate plan.

Failure to coordinate closely with the client’s estate plan may prove costly, and this is especially the case when the client’s Will and/or Trust Agreement provide for a series of specific cash bequests to named beneficiaries.

Many clients are advised or are under the impression that establishing beneficiary-designated accounts will avoid estate or inheritance taxes and will reduce probate court fees.  However, the establishment of such accounts does not reduce or eliminate estate tax or Connecticut statutory probate fees. 

In fact, heavy reliance on creating joint or transfer on death (TOD), or payable on death (POD) accounts not only can undermine the client’s estate plan, but can also put the Executor in a very difficult position since such property is not available to the Executor.  This thereby threatens the ability of the Executor to pay administrative expenses, taxes, and cash bequests.

While beneficiary-designated accounts can often be more readily available to the beneficiary after the client’s death, a competent estate settlement attorney can often expedite the appointment of the Executor, especially with the cooperation of the client’s family.

Other concerns arising from too much emphasis on the creation on beneficiary-designated property include the potential inequity among the decedent’s beneficiaries, and that such accounts can provide distributions to individuals whose shares should be, and were intended to be, held in trust for the benefit of the recipient for any number of non-tax reasons.  Two recent examples follow:

First, a client asked if he should check the “per stirpes” box on his Fidelity Non-Retirement Transfer on Death Form, and questioned whether his Will would cover the distribution of his assets among his descendants.  He did not realize assets in a TOD account do not pass to the beneficiaries named in the Will. 

Secondly, a financial advisor inquired about whether or not there was any potential problem with his clients creating a series of joint tenancy accounts with nearly $30 million of assets.  Both of these clients have estate plans with tax planning arrangements that would have been bypassed if their account had been retitled as joint or TOD/POD.

Other classic beneficiary-designated assets, of course, are life insurance and retirement accounts, so great care and attention must be given to coordinate those assets with the client’s estate plan, especially since they often form a significant portion of the client’s net worth.

Clients and their financial advisors are well advised to avoid the pitfalls of too much reliance upon beneficiary-designated property.  Consulting the estate planning attorney in any such changes will ensure proper coordination with estate planning arrangements.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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