When it comes to estate planning, avoiding probate is one of the main motivators.
Whether it’s designating beneficiaries or putting assets in a living trust, there are several ways assets can be directly transferred to heirs without going through probate.
But simply shielding assets from probate doesn’t automatically mean assets will be distributed the way you intended. Sometimes, the same strategies used to avoid probate can unintentionally override other parts of an estate plan, potentially leaving loved ones without the protection you put in place.
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Consider a father who has two adult children with different financial needs. One receives government benefits that have income and asset eligibility requirements. The other struggles with substance abuse and isn’t able to responsibly manage a large inheritance.
To accommodate both children, the father creates a revocable living trust with separate trusts made for each. This allows the father to leave an inheritance to both while also keeping protections they need in place.
Later, the father opens a bank account and purchases an annuity, naming both children as beneficiaries.
Once he dies, the bank account and annuity proceeds go directly to the children instead of the trusts that were created. While naming the children as beneficiaries of that account allowed the father to keep his assets out of probate, it also bypassed the protections he deliberately built into his estate plan.
While avoiding probate is an important part of the plan, it shouldn’t be the only consideration in this process. A beneficiary’s situation can matter just as much as how the assets get transferred.
For example, a beneficiary might receive government benefits that have income or asset restrictions, struggle with substance abuse or managing money, or could be dealing with a personal matter such as a divorce.
Leaving an inheritance to someone in one of these situations could jeopardize future benefits, leave money vulnerable or bring new financial responsibilities they might not be prepared for or capable of handling.
Instead of having assets transferred to them outright, you might choose to open a trust so you can manage the inheritance and determine when and how distributions are made.
However, those protections only work if the assets are directed to the trust. Naming the individual as the beneficiary rather than the trust itself could make the trust irrelevant altogether.
While trusts can be helpful in protecting and managing assets, they’re only one tool in the estate planning process. Reviewing how assets are titled and who’s designated to receive them after you die is important.
Look at bank and investment accounts, retirement accounts, real estate, life insurance policies and annuities. A beneficiary designation or other transfer arrangement on a particular asset could determine where it goes once you die, even if that overrides protections you’ve established elsewhere in your plan.
Avoiding probate is just one of many considerations when it comes to building an estate plan. What’s most important is making sure your assets are transferred to the people you intended in a way that accounts for their needs and circumstances.
For some, naming beneficiaries directly is enough. Others might find additional protections are necessary. Regularly reviewing your estate plan, making adjustments as needed, will ensure the strategies you use to avoid probate don’t work against your estate plan.