Avoiding Unintended Consequences of Beneficiary Designation
September 12, 2017
“What title would you like to give your new account?” Almost every bank — including Brokerage houses — asks this question when a client opens a new account. Depending on the circumstances, clients often create what’s called a payable on death (POD) designation for their account. A POD designation is a special type of bank account which confirms that any beneficiaries (listed by the account owner) will receive all assets within the account when the owner passes on. The beneficiaries do not have access to the account during the account owner’s lifetime. Future financial planning is crucial, and there are a variety of circumstances where POD designation seems like the best thing to do, especially in scenarios where an elderly parent/family member is involved. A different path that a bank account owner might take is to name someone else as a joint account holder. The joint account holder has immediate access to the funds in the account, and the assets in the account go to the joint account holder when the first joint account owner passes on. For example, if you have trouble keeping track of bills (perhaps some go unpaid while others are paid twice) adding one of your children as a joint account holder can help ensure your bills are in good hands. There are a variety of legitimate reasons for taking these actions, but it’s important to look at this kind of financial planning from every angle and consider all the potential consequences. That being said, do you know how joint accounts and POD beneficiary designations could alter your estate plan?
Let’s say you are finally getting around to doing that will. You have three children, and you’d like to leave equal one-third shares of your estate to each of them. You consult your attorney who drafts the will, ensuring that one-third of your estate will go to each child as planned. Everything seems to be in order, so you sign your name and get back to your routine. Later, you revisit the will, and something stands out regarding your brokerage account. This account, which holds the most substantial assets, lists your oldest child as the beneficiary, yet your bank accounts are held jointly with your youngest child — and he or she is the one paying the bills from this account. So, what happens if you choose to ignore this small detail? When the day comes, the situation typically unfolds like this: your brokerage account and the bank account pass outside the will to the people listed as beneficiaries, joint account holders or PODs. Which essentially means you just undid your entire estate plan, and your children receive anything but the one-third shares you originally wanted to give them. That’s when the misunderstandings, heated discussions and finger-pointing ensue. But with careful consideration of how your assets are titled when making an estate plan, you and your family can avoid experiencing these unintended consequences.
Some assets, such as an IRA, 401(k) and life insurance policies, always require a beneficiary designation. And while it is possible to name your estate as the beneficiary, doing so may cause the ultimate beneficiaries to lose some positive tax benefits — especially when things like the post-death IRA distribution rules come into effect. The post-death IRA distribution rules can cause some confusion — beneficiaries and/or their advisors sometimes assume they must adhere to the “5-year rule” (meaning they have 5 years to “empty” the inherited account after the date of death). But expanding distributions from the IRA over a longer period can help achieve tax-deferred growth and reduce the beneficiary’s tax burden. For assets like this, consider designating beneficiaries in a similar manner to what your will states.
The best way to avoid these unexpected and unintended consequences of a beneficiary designation is to discuss your options with an attorney. At Post Polak, our attorneys help clients with simple or in-depth wills, trusts, medical directives, powers of attorney and more. By looking at the entire financial picture, we help determine the best course for planning, including possible life insurance needs, key man insurance needs and buy-sell agreements for closely held businesses. Let us provide you with the peace of mind knowing that you have a plan in place which protects your loved ones. Call us today at (973) 228-9900 for your free consultation with one of our Trust & Estate attorneys, or contact us online.