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The Power and Risks of Beneficiary Designations

Many people have heard horror stories of the probate process: money and real estate locked up for years, thousands of dollars in attorney fees, and blow-out family disputes.  While those horror stories certainly exist, they are most likely the exception to the rule, and in our experience, they are frequently the product of poor, little, or no estate planning during life.

One of the most efficient methods to pass a significant portion of your estate to your successors is by maintaining beneficiary designations on your various financial accounts and other assets. A beneficiary designation, sometimes referred to as a payable on death (“POD”) or transfer on death (“TOD”) designation, allows you to designate the person(s) to whom those assets will be transferred upon your death.  During your life, you are the sole owner of the asset, and the beneficiaries have no rights in them.

The major benefit of having your beneficiary designations in place is that such assets are considered “non-probate” property and will avoid probate entirely.

Examples of assets for which you can typically include beneficiary designations include: Checking and Savings Accounts; Life insurance; CDs, Annuities and retirement accounts (401(k)s, IRAs, etc.); and Individual brokerage accounts. In addition, the majority of states, including Colorado, also permit the use of a “Beneficiary Deed” for real property, allowing you to automatically transfer ownership of your home or other real estate to your chosen successors upon your death.  As with POD and TOD designations, the chosen beneficiaries have no rights to the real estate during your life.

However, special care and attention should be paid when managing your beneficiary designations.

For instance, if you include more than one person as a grantee-beneficiary under a Beneficiary Deed to your home,

you will have forced those individuals into co-ownership of real estate.  If they cannot mutually agree on if and when to sell such real estate, there is a very real possibility that they will end up in litigation.  Additionally, bear in mind that since assets which include a beneficiary designation are considered “non-probate” property, they are not subject to the provisions of your Will.

As such, it is important to make sure that your beneficiary designations track your

wishes in your Will.  We have often seen situations where a decedent has named one of their children as a beneficiary, perhaps solely for purposes of expediency.  Legally, however, that one child becomes the sole owner of that asset to the exclusion of any others, regardless of what the decedent’s Will might say.