How Do Joint Accounts and Beneficiary Designations Work in Estate Planning?

Most people think a will is the most important tool in the estate planning toolbox, but in many instances, it is not even used. Assets in the will go through probate, and wills control assets in your name only. If you don’t have a will, your state laws will provide one under its law of Intestate Succession. Instead of making a will, some people just name their spouses or children on joint accounts, says the article “Protecting Your Assets: Joint Accounts and Beneficiary Designations” from The Street. however, that can lead to big problems.

Let’s look at a typical family. They own a home, an IRA, life insurance and some bank and investment accounts. They have wills that leave everything to each other, and equally to their children upon their deaths. If a child predeceases them, they want the child’s share to go to the child’s children (their grandchildren). This is called per stirpes, meaning it goes to the next generation. The husband and wife have also listed each other as joint owners and beneficiaries and then listed their children as contingent beneficiaries on all financial accounts.

When the husband dies, all his assets go to his wife. When she dies, she had named her living children as beneficiaries. If she signed a quit claim deed putting the children’s names on the house before she died, the will and probate may be bypassed altogether.

Sounds like a great plan, doesn’t it? Except like most things that sound too good to be true, this one is not a great plan. Here’s what can and very often does go wrong.

Let’s say a daughter inherits a bank account and is sued, files for bankruptcy or divorces. Her entire inheritance is vulnerable, with no protection at all.

What if you say in your will that you want everything to go equally to all three children when you die, but you only put one son as a beneficiary on your accounts? When you die, only one son inherits everything. The will does not supersede the beneficiary designation. If the son wants to keep all your assets, he can, no matter what he may have promised you and his siblings.

If the wife dies first and the husband remarries, he may want to leave everything to his new wife. He’s hoping that when she dies, she’ll distribute the assets from his first marriage to his children. He even has a will and changes the beneficiary designations on his investment accounts to make sure that happens. However, when he dies, she owns the accounts and can name whoever she wants to inherit those accounts. She has the legal right to cut out anyone she wants. The husband may have avoided probate, but his children are left with no inheritance.

We all like to believe that our spouses and children will do the right thing upon our death, but the only way to ensure that this will happen is to have an estate plan created using trusts and other planning strategies. Avoiding probate may be a popular theme but making sure your assets go where you want to them to is far more important than avoiding probate. Meet with an estate planning attorney to ensure that your family is protected, the right way.

Reference: The Street (Oct. 30, 2020) “Protecting Your Assets: Joint Accounts and Beneficiary Designations”