4 Ways to Pass Property at Death (part 2)

Welcome Back

Welcome back, I’m Greg Ashcraft and I’m an attorney with The Ashcraft Firm and I practice primarily in estate planning and this is the second of a four-week course. I am going to be talking to you about the four ways that you can pass property at the time of death.

Last Time…

Last week we talked about passing property through your estate. we talked about some of the pros of that method: it is really easy to set up, you don’t have to do anything. If you think your estate will need court oversight passing property through your estate might be the way to go. But there are a lot of downsides, and those are mostly associated with the fact that it is overseen by the court. It is costly, it is time-consuming and you lose some control over your property. There are a lot of reasons to avoid passing property through your estate. Any of the other three ways that we will be talking about will avoid passing property through your estate.

Passing Property By Contract

This week we will be talking about passing property by contract. So, what do we really mean when we say passing property by contract? We are really talking about passing property through a beneficiary designation, a contract between you and the custodian of that account. Also, you can use a transfer on death designation or a payable on death designation. These are all contracts that you are entering into with the custodian of that financial account. That is what we are talking about when we say passing property by contract.

Pros of Passing Property By Contract

1. When you pass property by contract it does avoid probate. Once of the pros of passing property this way is: avoiding probate. All of those problems that we talked about last week can be avoided by passing your property by contract.
2. Another one of the pros is that it is relatively easy to set up. There are other ways that you can set up your property that may be more time consuming initially. Typically when you set up a life insurance policy your financial advisor will work with you to set up a beneficiary designation at that time. When you set up an IRA or a 401(k) your financial advisor will typically set up that beneficiary designation with you then.

Cons of Passing Property By Contract

There are some cons associated with this.

1. Control: you don’t have any control over the terms of the contract. What I mean by that is, let's say for instance that you want to give all of your property to your brother. Included in that desire is that you want to give an IRA to your property. When you set up that IRA you created a beneficiary designation that lists your brother as the beneficiary. Let’s say that after you set that up, your brother passes away before you pass away. Typically, that beneficiary designation will state that your assets then pass to your estate and you are back in probate court. Now, you might say, I can control that. I can put a contingent beneficiary on that beneficiary designation. Now, that is true. Let’s say that you want to give all of your property to your brother’s children if he passes away before you. Typically, these contracts won’t let you give to a group. So you have to actually specify certain beneficiaries. Now let’s say that when you fill out the beneficiary designation your brother had two children and then he has a third child. If your brother passes away before you and you didn’t update your beneficiary designation, that third child will be left out of the distribution. Things like that often happen when you are passing property by contract.
2. Also, you can’t control how the distributions get paid out. Typically you just designate beneficiaries. You cannot say, I want to give my money to my minor child, but my minor child is not old enough yet, so I want to designate this person to watch over the money until my child is old enough. You can’t do that in a beneficiary designation. If on your IRA you listed your kids as contingent beneficiaries after your spouse and you and your spouse pass away together. Who is going to be in charge of the finances? It gets kicked back into probate to figure out who is going to take care of the finances. so that is another problem: you can’t control how the funds are paid.
3. Another thing that people don’t often think about is lifetime planning. A lot of times when people are thinking about estate planning, they think I will be either alive or dead. But a lot of us will have a significant period of time when we won’t be dead but we cannot take care of our own finances because of mental incapacity. These beneficiary designations just aren’t comprehensive enough if you become mentally incapacity and cannot take care of your finances.
4. For the fourth and final downfall. It is easy to set up but it is hard to maintain these beneficiary designations because you have one of these contacts with each one of your financial institutions. If something changes then you are going to have to update each contract with each institution. So even though it is easy to set up the beneficiary designations it is hard to maintain them.

To recap, the pros are that creating contracts with your financial institutions can

1. avoid probate and they are
2. easy to set up,

but the downside is that you

1. cannot control the terms of the policies,
2. you cannot control how the funds are paid,
3. you cannot do any lifetime planning with these designations and
4. they are hard to maintain in the long run.

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Nothing said in this post should be misconstrued as legal advice. The information is situational. You should seek legal counsel as to whether the strategies and consequences apply in your situation. Also, the very basic information given here is based on California law and may not apply in other states.