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

Many people use joint ownership or beneficiary designations as a method of avoiding probate. Others rely on them in lieu of a Will or Trust. Others name beneficiaries directly on assets to avoid probate at death. These assets certainly can avoid probate this way. However, the strategy carries many pitfalls. Formal estate planning can help you avoid them.

Joint ownership generally isn’t recommended as an estate planning strategy. The main exception is a married couple in certain circumstances. Adding owners to certain assets can create adverse tax consequences and increased liability. Joint ownership also avoids probate for only so long. Eventually, when no owners are living, probate will be necessary. The ownership interest must also be worded properly to avoid probate if the other owner dies.

Beneficiary designations have their own issues. For one, beneficiaries need to be adults. Otherwise, the probate court must step in to manage the asset for a minor until they turn eighteen. In addition, naming a beneficiary leaves no back-up plan for when that beneficiary dies. This approach ignores that beneficiary’s children and your other wishes.

Avoiding Probate With Joint Ownership

Long-Term Complications

Consider a joint owner on an asset, such as a home owned by a married couple. Eventually the second owner dies, or a common accident takes both owners at once. At that point, the asset becomes a probate asset, because no living owner remains. You can only avoid probate for so long by adding owners. The risks of doing so usually aren’t worth it.

Wording Complications

You also need to be careful about how joint ownership is worded. Suppose two names appear on a property deed without specific language stating that the property is jointly owned. In that case, the law assumes each owner holds an individual share. This is called “tenants in common,” and it’s the legal default. So if one owner dies, their share must go through probate in their own estate. 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 on a home. A Ladybird Deed lets you retain ownership during your lifetime. It then transfers ownership to a named beneficiary upon your death, thereby avoiding probate. This works well if the beneficiaries are all adults, are alive, and have no reason not to receive the property outright. Disqualifying reasons might include disabilities, government benefit qualification issues, or potential divorce or creditor problems. However, as a long-term method, a Ladybird Deed poses certain risks. You should discuss them with an attorney first. Many of these risks are the same ones that apply to beneficiary designations below.

Avoiding Probate With Beneficiary Designations

Minor Beneficiaries

Typically, assets that name beneficiaries avoid probate and pass directly to those beneficiaries by operation of law. However, this doesn’t work if you have minor children. Generally, a minor cannot legally inherit money outright. Instead, the probate court must establish a conservatorship for the child. The judge then appoints a conservator to manage the asset until the child turns eighteen.

Some people try to avoid this pitfall another way. They name an adult family member as the beneficiary instead of the minor child, with the “understanding” that the adult will only use the money for the child. The problem is that the adult isn’t obligated to do so. Legally, that asset becomes the adult beneficiary’s property upon your death. So if that adult later goes through a divorce or faces a creditor, the ex-spouse or creditor could take the asset. Now the minor child has nothing. And even if the adult did use the money for the child, gift tax implications may apply, depending on the amount. The bottom line is simple: the owner of the asset at your death is the named beneficiary, not the minor child.

Adult Beneficiaries

Even an adult beneficiary raises concerns. You may not want them to receive the money all at once upon your death, but that’s exactly what the law will do. This can be a problem for several reasons. Receiving everything outright might affect a disabled or special-needs beneficiary’s eligibility for government benefits. The beneficiary may be at risk for divorce or lawsuits. Or they simply may not handle money well. The bottom line is this: if you want to control who ultimately receives your money long-term, a beneficiary designation isn’t the best option.

Lack of a Back-up Plan

Another complication is the lack of a back-up plan if a beneficiary dies. Obviously, if a beneficiary dies while you’re still living, you can change the designation. But some people forget or never get around to it. And although it’s rare, a beneficiary could die at the same time as you, or shortly after. That would leave the asset without a living beneficiary. When that happens, the asset typically must go through probate.

Multiple beneficiaries create their own risk. Suppose you have three children and name them as equal beneficiaries on an account. Then one child dies before you. Upon your death, the asset will likely pass only to your surviving children. That may not be your intent. Perhaps you wanted your deceased child’s share to pass to their own children instead. A simple beneficiary designation will not accomplish that goal.

A More Comprehensive Approach

Are you curious about a more comprehensive approach to your estate plan? Perhaps you’d like to weigh the risks of naming joint owners, using a Ladybird Deed, or relying on beneficiary designations. If so, our Firm would be happy to consult with you.