What expenses can I eliminate? Every small business owner has grappled with this question. Most Americans have dealt with this question for their personal expenses as well. Legal expenses are one of the most attractive expenses to avoid.
Therefore, many Americans are more than happy to avoid the legal system by using accounts which automatically transfer on death (TOD). IRA’s, insurance policies, and bank accounts are a few examples. For small business owners, insurance policies can be a very useful tool to transfer a business interest within the family.
These are all great succession tools which can ease asset transfers. However, whether for business or personal finance, a person shouldn’t set up a TOD account, name a beneficiary, and think the matter is over.
First, institutions such as banks will expect the beneficiary to contact them to claim inherited assets. Therefore, heirs need to know that they have been named as a beneficiary or someone, such as an executor, needs to know who to inform about a bequest upon your passing. Make sure assets don’t sit in an account because a beneficiary doesn’t know what they’ve inherited.
Second, update your beneficiary as life circumstances change. It is common for people to name a spouse as the beneficiary of a TOD account. Then a divorce occurs while the beneficiary designation remains unchanged.
Another common scenario is that the named beneficiary passes away before the account owner. While rules vary state to state, a likely outcome is that the account will become part of the owner’s probate estate in both scenarios. If this happens the opportunity to have a non-probate transfer is lost.
You can avoid these outcomes by naming multiple beneficiaries. If you want the assets distributed equally, you can name co-beneficiaries. For example, in equal shares to your children. If one child passes away before you do, the remainder will go in equal shares to your surviving children. Or you can name a contingent beneficiary. This option is preferable for those wanting to leave assets to a spouse, but don’t necessarily want the spouse to have their share divided with other beneficiaries. Naming a spouse as the primary beneficiary, and children as contingent beneficiaries solves this problem. Many institutions will not automatically ask you about naming contingent beneficiaries. You should be proactive that you want to have contingent beneficiaries named.
TOD accounts are a useful tool. Like any tool they need to be used correctly in order to achieve the maximum benefit.