In Part 1 of this post I discussed: 1) beneficiary designations in general, 2) order of precedence between beneficiary designations and a Will, 3) primary and secondary designations and 4) special consideration when a minor might be a beneficiary.
In this post, I’ll address a situation when it is not a good idea to use beneficiary designations.
When is it Not a Good Idea to Use Beneficiary Designations?
Here’s a scenario that I’ve seen multiple times: The son of a deceased person, who was named as executor of the estate, comes to see me after his mother’s death. He is one of eight children. Nobody gets along very well. Mom picked him as executor because he’s fair and responsible and will get the job done properly.
He brings in a stack of medical bills, the funeral bill, the mortgage and other on-going expenses on the house, taxes and other expenses. He doesn’t think there will be a problem—his mom was a saver and had plenty of money in the bank. He can get the bills paid and get the house cleaned up and ready for sale. Once sold, he can then divvy things up and send the money out to the seven other siblings.
Except…when he goes to the bank, all the money is gone.
It turns out that someone helpful had suggested to Mom that she put all of the children on as beneficiaries of her accounts. Once Mom died, the bank froze the accounts and is sending out eight separate checks, payable to each of the eight children who were named as beneficiaries.
Now, the executor has no money to work with—only bills and a house that needs work before it can be put on the market.
There are solutions, but none of which are good:
- He can ask each of his siblings for some of the money back—that may not go well, or it may already have been spent.
- He can use his own money to pay the bills and get reimbursed later. That may—or may not—be possible.
- He can go to Court and ask a judge to order that the siblings return the money to the estate.
The better solution would have been for his mom NOT to have put beneficiary designations on all of the money in the first place.
It is Best Not to Use Beneficiary Designations When You Need One Person in Charge
When there are multiple heirs that likely cannot coordinate and work together, then you need one (or perhaps two people) to be in charge. In this case, you should not have each of your heirs as a beneficiary of most things. There needs to be ample liquid assets in the hands of the Executor to take care of business.
This means that things will likely go through the probate process. If you wanted to avoid probate in this scenario, you’d have to use a Trust as your main “who gets what” legal document instead of a “Will.”
Maybe I Should Just Name My Executor as Beneficiary? He’ll Take Care of Things.
That can work. Sometimes. Maybe. But I don’t recommend it.
Consider the same scenario as described above. Instead of naming all eight children as beneficiaries, Mom just named Junior (who is her executor), as beneficiary. This means that all of the money is going to him personally and not in his official role as executor of the estate. This might work out, but it is a very risky strategy:
Junior might be unscrupulous and simply keep all of the money. This is legally fine, since Mom did in fact name him sole beneficiary.
- Junior might be uncertain what Mom wanted. He did help her the most; maybe she intended to give him all of the money
- Junior might be in financial trouble. Maybe his creditors and the IRS end up with the money
- Junior’s marriage might be on the rocks. The money might end up entangled in his upcoming divorce
- Junior might have an unexpected medical catastrophe, and all the money ends up getting lost to his medical bills.
Beneficiary designations are important and useful tools in the estate planning process, but they are not right for all assets and all situations. They need to be used within the context of coordinated and thoughtful planning. In my next post, we will look at beneficiary designations vs. Transfer on Death designations.
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This blog is provided for general information and is not legal advice. You should not take any actions based on the content of this blog without seeking the advice of an attorney. To get advice on your particular situation, seek specific legal counsel from your own attorney. Also, some of the content of this blog is Indiana-specific and may not apply to your particular state of residence.