Unless you own property jointly or in a trust, certain items of property have to pass through your Probate Estate (i.e. under your Will). The car or bank account solely in your name, stock certificates (an awful form of property), the family house you did not place in a Trust, your personal property, all pass under your Will. Or, if you don’t have a Will, through Administration under the “Laws of Intestacy.”
However, some people make the misinformed decision to leave “operation of law” assets, such as retirement plans or life insurance, to their estate. Let me be very clear here: This is a BAD idea. The only reason someone would errantly do this is because they want court supervision of their assets, higher court and attorney fees, and a loss of creditor protection and more access for creditors.
First, retirement plans that name a person’s estate as a beneficiary have to withdraw ALL funds within 5 years. This is an income tax nightmare that destroys the ability to “stretch” RMDs to beneficiaries. And while retirement plans have favorable creditor protection, an estate does not. Your IRA that could have gone to your daughter tax deferred over her lifetime? Well, now funds can go to pay your credit card balance.
Secondly, life insurance that goes to your estate is equally available to creditors and increased Probate and legal fees. And it is also wrapped up in your estate until it is distributed possibly months later. Those funds your spouse needed to pay for expenses for a few months? Sorry, those are now locked up until estate matters are dealt with.
People who name their estate as beneficiary typically do it because it sounds sophisticated. Don’t do it – it is the furthest thing from being sophisticated! Always name a proper beneficiary to retirement plans or life insurance, fund a trust, and create “Transfer on Death” or “In Trust For” accounts for bank and brokerage accounts. This will increase your beneficiary’s income tax savings, minimize court fees, allow for faster distribution and keep your finances private.
