When creating your Indiana estate plan, you may spend considerable time deciding who should inherit your assets and how those assets should be distributed after your death. While a Last Will and Testament and, in some cases, a trust form the foundation of most estate plans, they are not the only tools that determine where your property ultimately goes. Some of your most valuable assets may pass according to beneficiary designations instead of the instructions contained in your Will or a trust. Moreover, when used properly, beneficiary designations can simplify estate administration and help your estate avoid the time and cost involved in probating an estate. With that in mind, the Indianapolis lawyers at Frank & Kraft explain how beneficiary designations can help your estate avoid probate in Indiana.
What Is a Beneficiary Designation?
A beneficiary designation is a legal instruction that directs a financial institution, insurance company, or retirement plan administrator to transfer a specific asset directly to a named individual or organization upon your death. Unlike property distributed under your Last Will and Testament or through the terms of a trust agreement, assets with valid beneficiary designations generally transfer by contract. Because the transfer occurs according to the governing contract rather than through your probate estate, those assets often bypass probate entirely which can significantly shorten the time required for your beneficiaries to receive those assets while also reducing the administrative responsibilities placed upon your Executor.
Which Assets Can Pass by Beneficiary Designation?
Many people are surprised to discover how many assets may transfer through beneficiary designations, allowing them to avoid probate altogether and making beneficiary designations one of the simplest probate avoidance strategies available. Common examples of assets that can be transferred via beneficiary designation include:
- Life insurance policies.
- Individual Retirement Accounts (IRAs).
- 401(k) and other employer-sponsored retirement plans.
- Pension benefits.
- Payable-on-Death (POD) bank accounts.
- Transfer-on-Death (TOD) brokerage accounts.
- Certain annuities.
- Health Savings Accounts (HSAs) and other financial accounts that permit beneficiary designations.
Why Do Beneficiary Designations Avoid Probate?
Probate is the court-supervised process used to administer property titled solely in your individual name that does not otherwise transfer automatically upon your death. Assets with valid beneficiary designations typically avoid probate because ownership transfers immediately according to the contractual terms governing the account. Instead of waiting for your Executor to obtain authority from the probate court, the financial institution generally distributes the asset directly to the named beneficiary after receiving the required documentation, such as a certified death certificate and claim forms. Although administrative requirements still exist, the process is usually much faster and less expensive than formal probate administration. Reducing the amount of property passing through probate may also simplify the administration of your estate while allowing your loved ones to access certain financial resources sooner.
Beneficiary Designations Override Your Will
One of the most important principles to understand regarding beneficiary designations is that they control the disposition of the affected asset, even if your Last Will and Testament contains different instructions. For example, suppose your Will leaves your entire estate equally to your three children, but your retirement account only names one child as the designated beneficiary. That retirement account will typically pass entirely to that child rather than being divided equally among all three children because the beneficiary designation effectively overrides provisions of a Will or trust. People often mistakenly believe that updating their Will automatically updates beneficiary designations; however, that is not the case. Beneficiary designation forms remain effective until you properly change them through the institution maintaining the account. As such, failing to coordinate and/or update beneficiary designations can unintentionally defeat your broader estate planning objectives.
Primary and Contingent Beneficiaries
Naming beneficiaries involves more than identifying a single individual given that most beneficiary designation forms allow you to name both primary beneficiaries and contingent beneficiaries. A primary beneficiary is the first individual or organization entitled to receive the asset after your death while a contingent beneficiary serves as a backup and receives the asset only if every primary beneficiary has died before you or otherwise cannot inherit. Including contingent beneficiaries is an important part of comprehensive estate planning. Without contingent beneficiaries, an asset may ultimately become payable to your probate estate if the primary beneficiary predeceases you. When that occurs, one of the principal advantages of beneficiary designations—avoiding probate—may be lost. Reviewing contingent beneficiaries regularly helps reduce this risk while ensuring that your assets continue passing according to your wishes.
Understanding Per Stirpes and Per Capita Designations
When naming multiple beneficiaries, you should also consider how assets should be distributed if one beneficiary dies before you. Two common approaches are per stirpes and per capita designations. A per stirpes designation generally allows a deceased beneficiary’s share to pass to that beneficiary’s descendants. For example, if one of your three children dies before you but leaves children of his or her own, those grandchildren would typically inherit their parent’s share. A per capita designation operates differently. Instead of passing the deceased beneficiary’s share to descendants, the asset is generally divided among the remaining surviving beneficiaries. Selecting the appropriate designation depends upon your family structure and your overall estate planning objectives.
Coordinating Beneficiary Designations with Your Estate Plan
Instead of being considered on their own, beneficiary designations should complement every other component of your estate plan. For example, if you establish a revocable living trust to manage assets for young children, individuals with disabilities, or beneficiaries who may not be financially prepared to manage a substantial inheritance, naming those individuals directly as beneficiaries of retirement accounts or life insurance policies could undermine that strategy. Instead, it may be appropriate in some situations to designate the Trustee of your trust as the beneficiary, so those assets are administered according to the trust’s terms. Likewise, your beneficiary designations should be consistent with your Last Will and Testament, trusts, Powers of Attorney, and long-term tax planning strategies.
Common Beneficiary Designation Mistakes to Avoid
Although beneficiary designations are relatively simple to complete, they frequently create estate planning problems when they are not reviewed regularly or coordinated with the rest of your plan. One of the most common mistakes is failing to update beneficiary designations after a major life event. Marriage, divorce, the birth of a child, the death of a beneficiary, or the creation of a trust should all prompt an immediate review because if you neglect to update your designations, assets may pass to someone you no longer intend to inherit from your estate.
Another common mistake is using vague language when naming beneficiaries. Rather than referring generally to “my children” or “my grandchildren,” it is often preferable to identify beneficiaries clearly according to the requirements established by the financial institution. Failing to name contingent beneficiaries is another frequent oversight. If your primary beneficiary dies before you and no contingent beneficiary has been designated, the asset may become payable to your estate, requiring probate administration that you may have hoped to avoid.
Do You Have Questions about How Beneficiary Designations Help Your Estate Avoid Probate in Indiana?
For more information, please join us for an upcoming FREE seminar. If you have questions or concerns about how beneficiary designations can help your estate avoid probate in Indiana, contact the experienced Indianapolis Medicaid planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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