The sharpest (estate planning) tool in the shed

IPop quiz: What is the most powerful estate planning tool?

Most people are thinking: “That would be a will, right”? And indeed, the good old Last Will and Testament is important, but it has its limitations. The biggest one is, the will only applies to assets that have to go through probate. Since many assets don’t go through probate, the will doesn’t apply to them. In fact, in a great number of cases, the will is never even used.

Others might be thinking: “A living trust is more powerful than a will. It even avoids probate”. And that it does, and a living trust can be a very powerful weapon in the estate plan. But a living trust has its limitations too, most importantly that the trust only applies to the assets you put into the trust. If an asset isn’t put into the trust, then the trust doesn’t work for that asset.

So what is more powerful than a will or a trust? Beneficiary designations.

Beneficiary designations are sometimes called TODs (for “transfer-on-death”) or PODs (“payable-on-death”). They are selections you make and attach to a particular asset, saying who gets it when you are gone. Chances are, you have at least one of these already. When you opened a bank account or a brokerage account, or took out a life insurance policy, they probably asked you who you wanted to receive the money when you die.

Beneficiary designations can completely bypass any will or trust. For example, if I have a savings account, and I designate my sister as the TOD, she gets the account as soon as I pass away. I might have a will which says everything goes to my children, but that doesn’t matter. If there is a TOD on that account, the asset does not go through probate, so that it doesn’t matter what the will says.

Now let’s say I have a living trust. I have two options with that savings account. I could put the account directly into the trust, so that the trust owns the account, which means that the terms of the living trust now override the TOD designation. Or I could make the trust itself the TOD, by listing the trust as the beneficiary directly with the bank. In that case, on my death the money goes directly to the trust, avoiding probate in the process, and the terms of the trust control what happens to that money.

But if I don’t do either of those things, my sister gets the account, regardless of the will or trust. Not my children.

This actually happens quite a lot. Sometimes it is intentional; more often it is not. People write out and sign a will, thinking that it controls all of their assets, and don’t realize that the old TODs on their accounts are still in place, and that those old TODs are going to override the will. Or they put a living trust in place, but they don’t do anything to get the account into the trust. That can cause a lot of grief later, when that person dies and the family members who should have received the accounts, don’t receive them.

There used to be one major limitation on using TODs in Alaska: you could not put a TOD on real estate. However, about six years ago the Alaska legislature passed a law allowing transfer on death deeds, so now you can actually designate a beneficiary on real estate. There is still the problem that there is no way to designate a beneficiary on vehicles, although as I write this, there is a bill pending in the legislature. But even if that passes, there are some people who have a lot of other personal property, such as precious metals, artwork, jewelry, tools or firearms, and there is no way to put a TOD on those. There is a simplified probate procedure, but if those assets add up to more than $50,000, you can’t use the simplified procedure.

So why not forget about all of this will and trust stuff, and just put beneficiary designations on all your assets? Well, the biggest reason is that you can’t put any conditions on a TOD, other than what happens if the person dies before you. If I want to say that my life insurance goes to my daughters when I die, I can do that. Depending on the insurance company, I can probably also say who gets any of those shares if one of them dies before me. But I cannot say that they only get it when they turn 30, or that it is to be used for higher education only, or that they forfeit the money if they are convicted of a drug crime, or any other “contingency”. For many people, those kinds of provisions are important, especially if the heirs are young.

So the best advice I can give is that you should have that will or that trust in place, but be fully aware that your beneficiary designations need to sync with the rest of the plan. Ignore the importance of the TODs, and they can destroy your whole estate plan.

Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account.