Some assets automatically pass to a designated beneficiary upon the owner’s death, often referred to as “non probate” assets. Common examples are bank accounts or life insurance policies where a beneficiary designation is made on the account. This may seem like a quick and efficient way to provide for the disposition of an estate, eliminating probate and avoiding the costs of working with an attorney. However, there are a number of drawbacks to relying solely on Payable-on-Death and Transfer-on-Death Designations.
1. Payable-on-Death and Transfer-on-Death Designations are inflexible. In the event that a beneficiary you name dies first, the interest may revert to your estate unless you update the beneficiary designation. In the event you have more than one account, this requires you to closely monitor your beneficiary designations and affirmatively make changes, on an account by account basis, which could be time consuming. There is also a chance that an account could be missed and the beneficiary designation not updated, which could cause unintended consequences such as the asset passing to someone you did not want to benefit or a probate proceeding. Payable-on-Death and Transfer-on-Death Designations do not allow for alternate or contingent dispositions, again risking unintended outcomes.
2. Payable-on-Death and Transfer-on-Death Designations do not provide access or management of the asset in the event of your incapacity. These non probate transfers only occur at death. Should you become incapacitated, other steps are necessary to manage the account for you, which could include court proceedings.
3. Payable-on-Death and Transfer-on-Death Designations are short term planning. Often, spouses are the Payable-on-Death or Transfer-on-Death beneficiaries, which ignores the longer term planning that estate planning should include. Even if everything passes to the surviving spouse based on Payable-on-Death and Transfer-on-Death Designations, the surviving spouse is faced with having to undertake estate planning steps alone. The surviving spouse would have to promptly update asset and account information (to remove the deceased spouse) and make new beneficiary designations. Until this is done, there is the risk that all the assets that avoided probate proceedings at the first death could be subject to probate at the surviving spouse’s death. This places a heavy burden on the surviving spouse who, in addition to grieving the loss of a spouse, may also be older, ill, or even incapacitated, making taking action impractical or even impossible.
In contrast to these limitations, a comprehensive estate plan will include tools that not only avoid probate but also provide for flexibility and comprehensive asset management during lifetime and after death. While Payable-on-Death and Transfer-on-Death Designations can be a part of your estate plan, they should be carefully coordinated and are not a substitute for comprehensive planning.
