Using Beneficiary Designations to Avoid Probate

In Estate Planning, October 2017, Steward Articles by Adam Cufr

Probate: the judicial process whereby a will is ‘proved’ in a court and accepted as a valid public document that is the last testament of the deceased.

Most people have ‘avoid probate’ as one of their estate planning goals because the process is public, lengthy, and expensive. Some people will suggest that you should put beneficiary designations on your assets (transfer on death (TOD), or payable on death (POD) designations) to avoid probate. While these kinds of beneficiary designations do avoid probate, it is not always the best idea, and can sometimes fail to achieve your needs and goals.

Take a look at the three ways that using beneficiary designations to avoid probate can fail you:

1. If your beneficiaries don’t survive you, the asset won’t avoid probate.

With POD and TOD designations, the asset is set up to be distributed to a designated person (or people) upon the owner’s death. For example, Mom sets up her bank account, POD to her daughter Sally.  When Mom passes away, her account is transferred to Sally, without any probate involvement. However, if Sally passes away before Mom, then there is no living beneficiary to pass the account to, so the account becomes a probate asset. In that case, the beneficiary designation failed to avoid probate at all.

2. With beneficiary designations, there is no centralized fund from which to pay expenses and taxes.

As we saw above, assets that have beneficiary designations are distributed directly to the beneficiaries upon the death of the owner. If the owner names more than one beneficiary on assets as a way to avoid probate, then this can create real problems with getting the estate administered and critical issues taken care of.

In any estate, whether it is a probate estate or not, there will be issues that need to be addressed. For example, final bills, medical expenses, and funeral and burial expenses will need to be paid. Someone will need to file and pay the final income tax return for the decedent. Someone needs to be given the authority and direction to do these things, and must be given the funds with which to pay these expenses. If assets are distributed directly to the beneficiaries, then there is no fund available to pay all of the expenses. 

We have met with a large number of families who suspected this would not be a problem for them because “everyone gets along” and “they’ll just figure it out.” In some of these situations, it all worked as expected, but in a number of them (much too large of a number, in my opinion), the situation turned sour. Not everyone was willing to contribute their share of the expenses and taxes from what they had received, leaving the others responsible for paying everything. That creates the potential for damaging, sometimes irreconcilable, conflict.

3. You cannot protect your beneficiaries using beneficiary designations

With beneficiary designations, the assets are given directly to the beneficiaries as an ‘outright’ distribution. In these cases, the assets are not protected. Here are some examples of what can potentially go wrong:

  • Judgment creditors can seize or garnish a beneficiary’s inheritance to satisfy their claim (even if it’s a ‘frivolous’ lawsuit).
  • Bankruptcy courts can seize a bankrupt beneficiary’s inheritance to pay creditors and costs.
  • Probate courts can impose ‘living probate’ if a beneficiary is now or later becomes incapacitated.
  • A divorce court might award some or all of a beneficiary’s inheritance to a soon-to-be ex-spouse.

The solution is to use a revocable living trust instead of beneficiary designations. With a trust, you can not only avoid a public, lengthy, and expensive probate process, but also plan for contingencies, avoid the risk of disputes, and provide protections for your beneficiaries.

While trust planning isn’t right for every situation, there are many, many circumstances that are often overlooked until after it’s too late, that could have benefitted from a revocable living trust. Naturally, the best way to determine which approach is right for you is to seek the council of an attorney. Please let us know if we can address any questions you may have.


Adam Cufr, RICP® (Retirement Income Certified Professional®) is a financial advisor and founding principal of Fourth Dimension Financial Group, LLC providing personal finance and retirement planning services. Adam is a Columnist for Retirement Advisor Magazine. He is also a sought-after media commentator and thought leader. Adam was named one of The 20 Most Creative People In Insurance in 2015 and is a columnist for Retirement Advisor Magazine and the author of Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.

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