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Why Is It Important to Designate a Beneficiary?

A question clients often ask is, “What happens to my assets when I die?

The answer to that popular question depends on what you do while you are alive.

When you die, your assets are essentially bulked into two general categories: (1) Non-Probate Assets; and (2) Probate Assets.

In order to determine if something is a non-probate or probate asset, you must look at the way in which the asset is owned.

Non-Probate assets are assets that automatically pass by operation of law to another person or entity, which is determined by the ownership of the asset. For instance, if you own an asset jointly with rights of survivorship with another person, that asset becomes the joint owner’s asset when you die. Likewise, if you own a bank or brokerage account and designate a specific beneficiary to the account, then the beneficiary can collect the contents of the account once you die.

Probate assets are assets that you own individually without any sort of beneficiary designation. These assets will pass pursuant to the terms of your Last Will and Testament (Will) once it is probated by the Surrogate’s Court in the county where you resided at the time of your death. The process of probating your Will is known as a Probate Proceeding. In a Probate Proceeding, the court will need to determine the validity of the Will and appoint an Executor to administer your estate.

If you do not have a Will, then your Probate assets will pass pursuant to the terms of the laws of intestacy of the State of New York. If this is the case, then someone will need to bring what is known as an Administration Proceeding in the Surrogate’s Court in order to have an Administrator appointed to collect your probate assets, pay your debts and liabilities, and distribute the remaining balance of your estate to your closest living relatives according to the law. In either case of a Probate or Administration proceeding, in order for anyone to access your probate assets, the court will need to be involved.

Having a joint owner on your accounts or designating a beneficiary expedites the process by which a person of your choosing can gain access and ownership to your assets when you die. It allows your joint owner or beneficiary to collect your assets without having to go through the costly and time-consuming process of probating your Will or petitioning the court for an administration of your estate.

Here are some scenarios that highlight when it may be a good idea to hold your assets with a joint owner or have a beneficiary designated:

Case Study #1Why Is It Important to Designate a Beneficiary?

Dave and Cindy have been married for years. Although Dave has recently executed a Last Will and Testament, he died before he was able to add Cindy as a beneficiary or joint owner on his bank and brokerage accounts.

As a result, all of Dave’s liquid assets, which consists of his bank and brokerage accounts, are probate assets. This means Cindy cannot access these assets until Dave’s Last Will and Testament is probated by the local Surrogate’s Court.

In the meantime, Cindy has debts and liabilities that were incurred as a result Dave’s death, in addition to the couple’s usual household expenses. She cannot afford to pay these debts without access to Dave’s funds. Unfortunately for Cindy, in order to pay the debts she must wait until the court probates the Will and appoints an Executor. Then she must wait until the Executor collects the assets and pays the debts.

If Dave added Cindy as a joint owner to his accounts or designated her as his beneficiary prior to his death, she would have been able to simply take his death certificate to the bank and brokerage firms to collect the assets immediately upon his passing.

Case Study #2

Years ago Tom had a falling out with his family, and he has been estranged from his parents ever since. As a result of the falling out, Tom would prefer his assets to go to his best friend, Pete. Tom is a hard-working man of moderate means, but has managed to save some money in a few bank accounts and an IRA, which total about $100,000.

Unfortunately, Tom passed away before he was able to create an estate plan, or designate a beneficiary to his bank accounts or IRA.

Since Tom never designated Pete as his beneficiary, when Tom dies, his assets will pass by operation of law to his parents, as his closest living relatives. Tom’s wishes for Pete to receive his assets are forfeited, and Pete has no rights to these assets.

There may also be instances when you may not want to add a beneficiary, such as if the beneficiary is a minor child or an individual who is on means-based benefits. In other cases you may want to remove or change your beneficiary designation, such as when your beneficiary dies or you become divorced or separated from your beneficiary.

It is important to discuss your beneficiary designations with an experienced attorney to make sure your wishes are honored.

Eric J. Einhart

Eric J. Einhart
Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530

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