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Plan Well, Retire Well

Saving and investing your money
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Do I need a will if I have named beneficiaries on most of my assets?


After my recent post about mistakes people make about naming beneficiaries – and the unintended outcomes that result – I received this question from a reader:

If our beneficiaries are in place, is a will still important for transferal of things? In what areas and ways? Does it speed up the process or limit lawyer entitlements? (These are things I hear) Also, are there advantages to a trust?

In order to answer these questions, we need a little background:

Your estate includes everything that you own. You might hear this referred to as the gross estate, or total estate.

Your probate estate is a subset of the total estate. The probate estate includes only those items that are controlled by your will, or by state laws of intestacy if you die without a will.

Contrary to what most people think, a will only controls those assets that are left after other methods of transferring assets have done their job. For example:

If you have a trust and you named the trust as owner of your house, investment account, farm, rental property, etc., the trust controls who gets those items at your death – not your will.

If you named beneficiaries on your IRA, employer retirement plan, life insurance, or annuity, those beneficiary designations control who gets those items – not your will.

Payable on death designations (for non-retirement financial accounts) and transfer on death designations (for real estate and, in Illinois, automobiles) work just like beneficiary designations. These are often abbreviated as POD and TOD. They control who gets those assets at your death – not your will.

If you own your home, car, checking account, or anything else with someone else as joint tenants with right of survivorship, the surviving owner(s) will automatically own the entire thing at your death. Your will does not control it.

So let's go back to the reader's first questions: If our beneficiaries are in place, is a will still important for transferal of things? In what areas and ways?

I have heard attorneys answer this question, and the answer is generally "Yes, you still need a will." There are several reasons. There are probably going to be some assets that you can't transfer using these other tools. You may fail take the actions needed such as titling an asset in the name of the trust or naming a beneficiary. The person you name to receive an asset could pass away before you do. Or they might disclaim it. Having a will is your safety net, even if it isn't your primary estate planning tool. And if you have dependent children, the will is the only place you can name a guardian for them.

Now let's address the second part of the reader's question: Does it (the beneficiary designation) speed up the process or limit lawyer entitlements? The answer is probably yes. Having a named beneficiary avoids probate for that asset, and therefore avoids the costs and delays associated with probate. In general, someone named on a beneficiary, POD, or TOD designation simply provides a copy of the death certificate along with proof of their identity, and the asset is theirs. Filling out the forms and making the best selections about how to handle an inherited an IRA or other retirement account can be challenging, but that would still be the case if they inherited through the will. Plus, inheriting through the will may limit their options about how and when to take the distributions.

If a lawyer is basing her fee on the value of the probate estate, then using beneficiary, POD, and TOD designations or trusts will reduce those fees because they reduce the size of the probate estate. In some states, there is also a probate fee or tax based on the value of the probate estate. So using these tools will also reduce those fees.

The reader's final question, Are there advantages to a trust?, will be answered in my next post. So stay tuned.



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