Complications with Joint Ownership and Beneficiary Designations as a Method to Avoid Probate

Many people use joint ownership strategies for their assets in lieu of a Will or a Trust, or name beneficiaries directly on assets as a method to avoid probate at their death.  Assets certainly CAN avoid probate through joint ownership or beneficiary designations; however, there are many pitfalls to adopting such a strategy which can be avoided through formalized estate planning.

Joint ownership is not generally recommended as an estate planning strategy (unless involving a married couple in certain circumstances), as there can be adverse tax consequences with adding owners on certain assets, as well as increased liability. Additionally, joint ownership only avoids probate for so long: eventually, when there are no living owners, then probate will be needed. The ownership interest also needs to be properly worded to avoid probate if the other owner dies.

Beneficiary designations as an estate planning strategy have their own issues as well. Beneficiaries need to be adults.  Otherwise, the probate court will need to be involved to manage the asset for the minor beneficiary until the age of eighteen. Also, when you name a beneficiary to an asset, there is no comprehensive back-up plan when the beneficiary dies, considering that deceased beneficiary’s children or other wishes.

Complications with Joint Ownership to Avoid Probate:

• Long-Term Complications with Joint Ownership: Even if there is a joint owner on an asset (such as owning a home as a married couple), eventually, when the second owner dies, OR if there is a common accident where both/all owners die, then that asset will become a probate asset because there is no longer a living owner. You can only avoid probate for so long by adding other owners, and the risks in adding additional owners are usually not worth it.

• Wording Complications with Joint Ownership: Additionally, you need to be careful about the wording of joint ownership. For example, if two individual names are listed on a deed to property WITHOUT specific verbiage in the deed that the property is jointly owned, then the law assumes that EACH owner has an INDIVIDUAL share in the property. This is called “tenants in common” and is the legal default without language stating otherwise. This means that if one owner dies, then their share needs to be probated in their own estate and that share does NOT pass to the surviving owner.

• Ladybird Deeds in Lieu of Joint Ownership: Most people have heard the term “Ladybird Deed” as a way to avoid probate regarding ownership of their home. A Ladybird Deed allows a person to retain ownership on the property during their lifetime and then transfer ownership to a named beneficiary on a deed upon their death, thereby avoiding probate. If the beneficiaries that are listed on that deed are all adults, are alive, and have no reason why they should not receive the property outright (such as disabilities, government benefit qualification issues, or potential divorce/creditor issues), then a Ladybird Deed can effectively transfer ownership of your property without the need for probate. However, as a long-term estate planning method, a Ladybird Deed does pose certain risks that should be discussed with an attorney before utilizing it. Many of these risks are the same for beneficiary designations which are discussed below.

Complications in Using Beneficiary Designations to Avoid Probate:

• Minor Beneficiaries: Typically, assets that name beneficiaries avoid probate upon your death and pass by operation of law directly to the named beneficiaries. However, this does not work if you have minor children. Generally, a minor cannot legally inherit money outright. A conservatorship proceeding would need to be established for the minor child through the probate court system and a conservator would be appointed by the judge to manage the asset until the child turns eighteen years of age.

  Some people try to avoid this pitfall by naming an adult family member as a beneficiary, instead of the minor child on a particular asset, with the “understanding” that the adult family member will only use the money for the benefit of the child. If you use this as method to distribute assets to a minor, the problem is that the adult beneficiary is not obligated to use that asset for the benefit of the minor child. Legally, that asset becomes the adult beneficiary’s asset upon your death. As such, if that adult beneficiary went through a divorce or had an issue with a creditor after your death, then the asset could be taken by the ex-spouse or creditor.  Now the minor child has nothing.  Even if the adult beneficiary DID use the money for the child, there also may be gift tax implications, depending on the amount of money at issue. The bottom line is that the owner of the asset at your death is the named beneficiary, NOT the minor child.

• Adult Beneficiaries: Even if your named beneficiary is an adult, you may not want your beneficiary to receive the money all at once upon your death (which is exactly what will happen under the law). This can be an issue if there is any reason you wouldn’t want your designated beneficiary to receive everything outright, such as adversely affecting his or her’s eligibility for government benefits (if the beneficiary is disabled or has special needs), or is at risk for divorce or lawsuits, or who simply is a person who does not handle money well. The bottom line is that if YOU want to control who ultimately receives your money long-term, then a beneficiary designation is not the best option.

• Lack of Back-up Plan with Beneficiary Designations: Another complication in using beneficiary designations as an estate plan is the lack of a back-up plan if a beneficiary dies. Obviously, if a beneficiary dies and you are still living, then you can change the beneficiary designation. But some people forget or don’t get around to doing that. Also, although it is rare, a beneficiary could die at the same time as you, or shortly thereafter, which would leave the asset without a living beneficiary. If there is no living named beneficiary, then typically that asset must be probated.

  Additionally, if you have multiple primary beneficiaries, you may run into unintended consequences if one of them dies.  For instance, if you have three children and name them all as beneficiaries equally on an account, and then one of your children dies before you, the asset will likely only pass to your surviving children upon your death. This may not be your intent. Maybe you wanted your deceased child’s share of the asset to pass to their own children.  A simple beneficiary designation will not accomplish this goal.

If you are curious about a more comprehensive approach to your estate plan, or would like to consider the potential risks associated with either naming joint owners on an account, using a Ladybird Deed, or using beneficiary designations as methods of estate planning, our Firm would be happy to consult with you!