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Making Gifts through Your Beneficiary Designations

By Brian Dobben

Beneficiary designations can provide a relatively simple way to support your favorite Advocate hospital or program. Considered a “will substitute,” a beneficiary designation dictates how the assets in an associated account will be distributed at the owner’s passing.

Essentially, there are three ways to transmit property at death: intestacy, wills and will substitutes. Intestacy refers to the state law which applies in the event that a person dies without a will and instructs how the assets should be distributed. In that event, the state “makes a will for you.” State law governs who receives the property and in what amounts. A will is a signed, written document which directs how a person’s assets are to be distributed at death. Most people are somewhat familiar with wills, and there is a general concern that wills require the use of the court process commonly known as “probate.” Will substitutes, such as beneficiary designations, joint tenancy and revocable trusts allow property to pass at one’s death without going through the probate system. Probably the most often discussed will substitute is the revocable living trust. However, the use of the beneficiary designation as a will substitute is extremely important and its use has become so widespread because it can control significant assets.

The use of beneficiary designations has a fairly long history. A section on Pay on Death (“POD”) beneficiary designations was included in the Uniform Probate Code in 1969. Assets such as insurance policies, account agreements, pension plans and individual retirement plans were specifically permitted to allow for the designation of a beneficiary at the account owner’s death.  In 1989, the Uniform Transfer on Death Security Registration Act was drafted to permit securities to be registered with a Transfer on Death (“TOD”) designation. Almost all banks and brokerage firms now have standard forms which permit the account owner to designate a beneficiary or beneficiaries at the account owner’s death.

By using POD and TOD designations, often a person’s most valuable assets such as life insurance, pensions, IRAs and investment accounts will pass directly to a named beneficiary or multiple beneficiaries. Usually the completion of the beneficiary designation form can be done online or through easily obtained paperwork. The signing formalities associated with a will, such as two witnesses attesting to the person’s competency, typically are not needed.

Completing a beneficiary designation can be simple, but the form must be completed with care.  The advice of an estate planning attorney is important because of the different issues that may arise. For example:

  1. The beneficiary designation may have income tax consequences. Often it is important that an individual’s spouse be named as the primary beneficiary of tax-qualified retirement plans, such as IRAs and 401(k) plans. This allows the surviving spouse to further defer income taxes. Tax-qualified benefit plans are subject to both estate tax and income tax. It may be appropriate to name a charity such as the Advocate Charitable Foundation as a primary or contingent beneficiary in order to eliminate or reduce taxes.
  2. Naming minors as POD or TOD beneficiaries is problematic. Financial institutions will not distribute assets to a minor. A court-appointed guardian for the minor will be required which will probably necessitate annual accountings to the court.
  3. The beneficiary designation must be coordinated with a person’s existing will and trust. A person may spend significant time, effort, and professional fees in creating a trust with provisions which reduce estate taxes and address the particular needs of his or her family. This work will be futile if significant assets pass outside the trust because of beneficiary designations put in place years ago and since forgotten.
  4. Each beneficiary designation form needs to be closely studied to understand where the property will pass if the primary beneficiary predeceases the account owner. This is a matter of contract and can vary depending on what the financial institution provides in its documents.
  5. Both state law and the beneficiary designation must be studied to determine what happens in the event a person obtains a divorce from his or her spouse but, at death, the former spouse is still listed as the beneficiary.

In short, the completion of a beneficiary designation form without proper advice can lead to unintended consequences, higher taxes and even litigation. As a part of the estate planning process, the beneficiary designation of assets should be carefully reviewed with one’s estate planning attorney.

For more information on how beneficiary designations might fit into your charitable plans, please feel free to contact John Holmberg in Advocate’s Office of Gift Planning at 630-929-6945 or at john.holmberg@advocatehealth.com.

Brian Dobben is an attorney and founder of Dobben Law. He focuses his practice on estate planning, estate and trust administration, estate taxation and business succession planning. Brian is also a member of Advocate Charitable Foundation’s Gift Planning Advisory Committee.