Beneficiary Designations: Will Your Property Reach the Person Intended? 

By Keith Burroughs
keith@bcnattorneys.us

Clients often inquire as to whether they can leave their property at their death by beneficiary designation as a means to avoid making a will, probating an estate or establishing a trust. There are times when beneficiary designation is an effective means to distribute property to specific persons at death. However, depending on how life circumstances present themselves, the passage of property by beneficiary designation is not always as simple as it may first appear.

Benefits Subject to Court Supervisions

Specifically, life insurance policies, annuity contracts, retirement plans, stock and bond accounts and bank accounts are the types of assets that typically permit the owner to make a payable on death (POD) or transferable on death (TOD) designation. By completing the beneficiary designation for such property, you can identify particular persons, either by name or by class, to receive your property at your death. Generally, you are also allowed in those instances to designate primary beneficiaries and secondary (contingent) beneficiaries. As the names would indicate, the primary beneficiary is the primary person or persons to whom you want the property to pass at your death, but if one or more of the primary beneficiaries are not alive, then the secondary or contingent beneficiaries receive the property.

Sometimes, however, the use of beneficiary designation to pass property at death can have unintended consequences. For example, if a person names a spouse as primary beneficiary and children as secondary beneficiaries, but the spouse is not living at the owner's death, the property is distributable outright to the secondary beneficiaries (i.e. children in this example). If one or more of the children is a minor(under 18 years of age in Tennessee) or a disabled person, then the benefit payable by the designation will be subject to court administration and require the appointment of a guardian or conservator for the minor's or disabled person's property.

There is a pecking order for people with priority who can be appointed as the guardian or conservator over the property, and it may be someone that you would not otherwise select to be in charge of the beneficiary's property.

An alternative to avoid this scenario is to establish a trust, either by will that comes into effect at your death or an inter vivos (during lifetime) trust, and designate that trust as the secondary beneficiary of your beneficiary designation. As the creator of the trust, you can designate the person or institution to be in charge of management of the property (i.e. trustee) for the child or disabled person and avoid the necessity to account upon the public records of the court concerning the investment and use of the property. Although Tennessee law allows a benefit of this nature to be paid to a guardian without court supervision if the amount is less than $10,000.00, all other benefits in excess of $10,000.00 must be controlled by court supervision, requiring further an annual accounting and a property management plan describing how the assets will be invested and distributed each year.

By establishing a trust, either through the will of the deceased owner or during lifetime, and designating the proceeds to be paid to the trust, the expense and inconvenience of court supervision can be eliminated.

Contractual Control of Beneficiary Designations

Another consideration when attempting to leave an asset by beneficiary designation is contractual limitations that may be placed on the right to designate a beneficiary. For instance, most every institution with which assets are held that allows a beneficiary designation also sets forth in the contract with the investor or owner of the asset limitations on language that can be used in a beneficiary designation. Unless you have designated a beneficiary that conforms with the restrictions of the contractual language provided by the institution, your beneficiary designation may not be effective to pass the property as intended at your death. Additionally, some contracts have automatic construction provisions regarding the interpretation of a beneficiary designation.

For instance, some contracts provide that if you name your children as contingent death beneficiaries, only the living children will receive the property at your death. If a child in that class predeceases the owner of the contract, his offspring will not share in the distribution of the asset at the owner's death, but rather the benefit will only be distributed among the members of the class that are then living. If the proceeds were payable on death to the estate of the owner or to a trust and the provisions of the trust direct the distribution among the living children and children of any deceased child, at certain ages, then the offspring of the deceased child would share in the distribution.

Conclusion

As the foregoing illustrates, the persons you designate to receive particular property by beneficiary designation may be different than you intend. If you attempt to distribute assets through payable on death designation or transferable on death designation, you should be careful to read all of the contractual language associated with the asset to be sure that the persons you intend to receive the benefits from the assets are actually the persons who will in fact be the recipients under the terms of the contract. You may also want to consult with your legal counsel to assist you in this process.