Estate Planning

Do Beneficiary or Joint Accounts Avoid Probate?

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Whether intentionally or not, some people are of the opinion that a trust is not necessary either because they have someone else named on their account or because there is a beneficiary. So can beneficiary-designated accounts or joint accounts avoid going through probate?

Well, it depends. Keep reading…

Avoiding Probate with Beneficiary Accounts

If an asset has a beneficiary attached to it, it will not go through probate if the following factors are satisfied. First, the named beneficiary is a living adult. Second, the beneficiary can be located. For example, a retirement account or life insurance policy may name a beneficiary. If the beneficiary is a living adult who can be located, the money in the account belongs solely to the beneficiary. No probate is necessary as long as the institution holding the money can distribute the funds to the beneficiary. Potential problems with beneficiary designations include:

Minor beneficiaries

A minor child cannot “own” assets until he or she has reached 18 years old. As a result, if the beneficiary is a minor, there will be a probate court proceeding called a “guardianship of the estate”. A guardianship of the estate is problematic because the court will be involved on an annual basis.

Incapacity issue

If you are incapacitated, you effectively will be unable to access your funds because of your incapacity. Similarly, your beneficiary also will be unable to access your funds because you are still alive.

Unintended beneficiaries

Sometimes people name beneficiaries and forget to update contact them. Often, folks will still have ex-spouses named as beneficiaries instead of children. In those cases, the funds legally belong to the beneficiary. In other situations, beneficiary information is not updated and so institutions cannot locate the intended person(s).

Inability to control distributions

One of the downsides of beneficiary designations is that the beneficiaries can do whatever they want with the funds. While this may be fine for some people, for younger beneficiaries it can be a recipe for disaster. After all, it’s not uncommon for younger beneficiaries to lose their inheritances rather quickly.

If beneficiary predeceases

If the primary beneficiary is alive at the time the owner of the account dies, but then the primary beneficiary dies before the distribution of the asset, there is a probate! Many people – including advisors – mistakenly assume that the asset will automatically go to the contingent beneficiary named on the account. This only occurs if the primary beneficiary pre-deceased the owner. For a detailed article on a related issue, read our article, “What Happens When a Beneficiary Dies?

Avoiding Probate with Joint Ownership

If an asset is owned jointly, it will not go through probate if the following factors are satisfied. First, the named account holder is a living adult. Second, the person can be located. Lastly, if the joint ownership consists of either joint tenancy or community property. For example, a home owned by husband and wife as community property with rights of survivorship would avoid a probate if one of them died. A bank account owned as joint tenants would also avoid probate if only one of them died. Potential problems with joint ownership include:

Tenants-in-common

If a home is owned as a tenant-in-common, then the death of one tenant-in-common leads to a probate of his or her share. This is a big difference between joint tenancy, in which the share of the decedent will automatically pass to the other joint tenants.

Unintended consequences

Many times a parent names one of their children to be a co-owner on a bank account (or home). The parent thinks that if something happens, the child will take over the asset. The asset however now legally belongs to the child when the parent dies. The child is not required legally to share the asset with any of their siblings, because it now legally belongs to that specific child only. Even in situations where the child wants to share the money in the account or the home with their siblings, they will run into gift tax problems. They might have to make taxable, reportable gifts to their siblings. This ends up being more work than originally envisioned by the parent.

Simultaneous death

If all the owners were traveling and got into an accident at the same time, there could be a probate. Thus, naming a child on an account usually isn’t “safer” if you’re worried about accidents or anything of the sort.

Loss of step-up in basis

One of the most common reasons never to add a child, or anyone else, to an account as an owner is that the person added may lose the ability to take a step-up in basis on the assets when the original owner dies. For more information on how this works, please read, How the Step-Up in Basis Works.

Additional Liability

Adding someone, like a child, to your asset increases your potential liability risk in case that person gets sued, divorced, or declares bankruptcy, to name just a few reasons.

Filing a gift tax return

If you add someone to your asset, you likely are making a taxable gift. This gift should be reported on Form 709, if the amount being gifted is more than $15,000. Many people neglect to think of this. They say, “But I’m adding my child to the deed of my home only in case something happens to me.” This does not matter. By adding someone to your asset, you are making a taxable gift and this has its own repercussions.

To avoid these added risks, it is recommended to use a trust whenever possible. This avoids probate and is better from a tax standpoint, control standpoint, and efficiency standpoint.

Discuss Your Probate Options with the Estate Planning Professionals at Bridge Law LLP

This article is a service of Bridge Law LLP. We are an award-winning law firm that specializes in business and estate planning for clients like you.The goal for every family is to stay educated, avoid probate, avoid estate taxes, and build a legacy for you and your loved ones. What sets our firm apart is that we build lasting, lifelong relationships with our clients. They rely on us to keep them updated and provide sound legal counsel. Lastly, we are there for them immediately if any problems should ever arise. Not to mention, we don’t charge hourly fees to our families. You will never have to worry about speaking to us. If you’re ready to keep your family out of Court, contact us today to schedule an initial consultation.

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